Reframing the Misappropriation Theory of Insider Trading Liability: A Post-O’Hagan Suggestion

Abstract

For almost two decades, the United States Supreme Court was silent as to the validity of the so-called 'fraud on the source' misappropriation theory of insider trading liability. This changed in June 1997 when the theory received a resounding endorsement from the Court in United States v. O'Hagan. Critics of O'Hagan have argued that the Court's decision reaches too far. However, this Article contends that the Court actually endorsed a theory that does not reach far enough. By analyzing and critiquing the reasoning of the majority opinion in O'Hagan, this Article demonstrates that the Court's unnecessarily restrictive misappropriation theory will frustrate the prosecution of future cases involving trading on misappropriated information and may generate public mistrust of the SEC. This Article suggests a broader 'fraud on investors" version of the misappropriation theory, contending that investors in the marketplace are also deceived and defrauded when a person purchases or sells securities based on material, nonpublic information that has been misappropriated from the information's source.

Keywords: insider trading