Insiders, Watch Your Backs

A high court ruling sharpens the SEC's enforcement power

For nearly two decades, the Supreme Court has been Public Enemy No.1 for anyone bringing a securities fraud suit. It has shortened the time for filing cases and barred claims against lawyers, accountants, and investment bankers accused of aiding scams. And it has tossed out cases against printers and financial analysts accused of trading on or spreading inside information.

But on June 25, the justices upheld the conviction of a Minneapolis lawyer who stole inside information from his firm, which represented a buyer in a planned tender offer. The justices bought the argument that insider trading bans aren't limited to execs and their close advisers. "This is a good decision for small investors and market integrity," says William R. McLucas, the Securities & Exchange Commission enforcement chief, who calls it the biggest victory for his agency in 15 years. The ruling could make the SEC much more aggressive.

The 6-3 decision, written by Justice Ruth Bader Ginsburg, reverses an appeals court ruling that tossed out the conviction of James H. O'Hagan, a partner in the law firm Dorsey & Whitney. In 1988, while his partners represented Grand Metropolitan PLC as it prepared a tender for Pillsbury Co., O'Hagan started buying call options on Pillsbury shares. He later bought stock and eventually made more than $4.3 million.

The ruling bolsters the "misappropriation" theory, where the SEC simply goes after people who steal confidential information and trade on it. Insider trading cases typically involve those who violate a legal duty to shareholders. But under misappropriation, the trader need only have a duty to the information source--in this case O'Hagan's firm and Grand Met. Ginsburg said that not everyone has equal access to data, but "investors likely would hesitate to venture their capital in a market where trading based on misappropriated, nonpublic information is unchecked by law."

Some lawyers were stunned at the outcome, partly because the court had been so hostile to securities litigation and partly because it usually interprets criminal laws more narrowly. "I'm surprised," says Arthur F. Mathews, a Washington (D.C.) securities lawyer. "The pendulum seems to have swung."

Can the SEC now nab everyone from office cleaners to psychiatrists who get inside dope? Future rulings will tell. But for now, the justices seem willing to leave at least a few arrows in the government's antifraud quiver.

    Before it's here, it's on the Bloomberg Terminal.