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Pillsbury dough boy investments

Jim Porter

Grand Metropolitan, a company based in London, retained a Minneapolis law firm regarding a potential tender offer to buy Pillsbury Company stock.

Grand Met’s plans to buy Pillsbury were confidential.

James O’Hagan, a lawyer for the Minneapolis firm who did not work on the purchase transaction, silently acquired stock and call options for Pillsbury at a price of $39 per share.

When Grand Met announced its tender offer, the price of Pillsbury stock rose to nearly $60 a share. O’Hagan made a tidy profit of more than $4.3 million.

O’Hagan became the Pillsbury dough boy.

SEC indictment

The SEC filed a 57-count indictment against O’Hagan claiming he defrauded his law firm and its client Grand Met by using material, non-public information regarding Grand Mat’s planned tender offer for his own trading purposes

A jury convicted O’Hagan, who was sentenced to a 41-month term of imprisonment. A divided panel of the Court of Appeals reversed the conviction and the matter found its way to the U.S. Supreme Court.

The issue

O’Hagan’s defense was that he was not an “insider”. Under the “traditional theory of insider trading liability, a violation of insider trading regulation, section 10(b), occurs when a corporate insider trades in his corporation’s securities on the basis of material, confidential information he has obtained by reason of his position. Pillsbury and its employees and lawyers, if they acquired stock with inside information, would be liable under the traditional insider trading statutes.

O’Hagan was an outsider. He did not work for Pillsbury and owed no legal duty to Pillsbury or its stockholders.

Decision

In a 6-3 ruling, the Supreme Court held that O’Hagan could be prosecuted for using inside information even if he did not work for Pillsbury or owe any legal duty. He owed a duty to his law firm and its client who proposed to purchase Pillsbury stock.

Justice Ginsberg wrote, “It would make scant sense to hold a lawyer turned-trader like O’Hagan a Section 10(b) violator if he works for a law firm representing the target of a tender offer, but not if he works for a firm representing the bidder…. A fiduciary who pretends loyalty to the principal while secretly converting the principal’s information for a personal gain dupes or defrauds the principal.

A company’s confidential information qualifies as property to which the company has a right of exclusive use; the undisclosed misappropriation of such information constitutes fraud akin to embezzlement.”

The case was seen as a victory for the Clinton administration, who sought a broader prosecution net for insider trading.

(Jim Porter is an attorney with Porter Simon, with offices in Truckee and Reno. He is also a mediator.)


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