Supreme Court Considers Insider Trading Case
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CHARLAYNE HUNTER-GAULT: The case before the Supreme Court today deals with insider stock trading and who is an insider and who is not. To help us understand that, what difference it makes, and what happened in today’s arguments we have NewsHour regular Stuart Taylor, correspondent for the American Lawyer and Legal Times. And Stuart, as you are best equipped to do, explain in the simplest terms what is insider trading.
STUART TAYLOR, The American Lawyer: There’s a big argument about this, but in the usual lay sense, what most people mean, is insider trading would be trading a company’s securities, stocks, bonds, for profit, typically a big profit, based on inside information about that company’s value stolen from somebody.
The classic case might be the president of an oil company that’s publicly traded learns that they’ve just scored a huge hit, a new discovery, and the stock’s going to go through the roof in a week when they announce it. And he goes out and buys a bunch of the stock beforehand. He’s stealing his own company’s information from his other shareholders, if you will, for his personal profit.
CHARLAYNE HUNTER-GAULT: It doesn’t matter how he learned it?
STUART TAYLOR: In the usual sense, in the general sense in which I’m defining it, the Supreme Court has said not everything that might be called insider trading, the way I’ve just defined it, is, in fact, barred by the federal securities laws.
CHARLAYNE HUNTER-GAULT: Well, let’s don’t go there yet.
STUART TAYLOR: Right.
CHARLAYNE HUNTER-GAULT: Let’s continue on where we are. So anybody–did you have another example?
STUART TAYLOR: Well, in this case it’s a little trickier because he didn’t supposedly steal the money from the company whose stock he was trading–and that’s part of what the argument is about–he stole it from another company that was planning a takeover.
CHARLAYNE HUNTER-GAULT: Okay. Let’s just back up a couple of steps. The guy in question is James O’Hagan.
STUART TAYLOR: That’s right.
CHARLAYNE HUNTER-GAULT: So we want to know what he did to be convicted of insider trading.
STUART TAYLOR: He was a big shot partner in the largest law firm in Minneapolis, Dorsey & Whitney, and represented a lot of big clients and liked to play the stock market and had gotten himself in something of a hole in part because he’d stolen some client trust funds and was prosecuted for that.
But the insider trading came when he wanted to make a lot of money in a hurry, and according to what the jury found, he learned from one of his partners that his–that a big company had retained his law firm to help a big takeover. Grand Metropolitan of London was his law firm’s client.
They were planning a takeover of the Pillsbury Company, which was a big food company in Minnesota. He learned about it, ran out and bought a bunch of options and shares in Pillsbury, and spent about $400,000 on that, and ended up making a profit of over $4 million when, in fact, the takeover went forward, and the stock rose rapidly, as typically happens in a takeover.
CHARLAYNE HUNTER-GAULT: And so he went to jail, or–
STUART TAYLOR: He has not gone to jail yet, although if the government wins this appeal, he will go to jail. He was convicted by a jury on 50 some counts of fraud under three different federal laws. But he won his appeal.
CHARLAYNE HUNTER-GAULT: Okay. Now before we get to that, he was not himself involved in the transaction. He just heard about it from some–in some way.
STUART TAYLOR: Right. The testimony from his partner was–the partner who was involved in the takeover–was that O’Hagan came in, said, hey, I’d like to work on this case, I hear you’re working on a takeover for Pillsbury, and the partner confirmed this, and then according to the government, he runs out and buys a bunch of Pillsbury stock. In fact, he’d started buying Pillsbury stock before that.
CHARLAYNE HUNTER-GAULT: And made all this money.
STUART TAYLOR: Right.
CHARLAYNE HUNTER-GAULT: All right. Now, why was it that the 8th Circuit Court of Appeals threw the conviction out?
STUART TAYLOR: The 8th Circuit said that what he’d been convicted of doing was illegal–I’m sorry–was unethical and immoral, but according to the 8th Circuit, it didn’t violate any securities fraud law that Congress has actually ever enacted because Congress has never defined what insider trading is.
And the 8th Circuit in general said we must define it rather narrowly, given that Congress hasn’t chosen to give us a broad definition, and criminal law should be strictly construed. And we think that if you steal information from company A and use it to go buy shares in company B, it’s not securities fraud because you didn’t steal the information from the same company whose stock you are buying.
CHARLAYNE HUNTER-GAULT: Right. So today, what did the Justice Department–how did it get to the Supreme Court?
STUART TAYLOR: The Justice Department and the SEC, which are both very interested in this case, brought it to the Supreme Court and said we’re going to be terribly handicapped in policing the securities markets and stopping insider trading unless you overrule this decision and reinstate O’Hagan’s convictions.
CHARLAYNE HUNTER-GAULT: So briefly, what was the Justice Department’s main point, main thrust in its argument today?
STUART TAYLOR: The main thrust of their argument is that both the precedence and the language of the relevant laws justify a fairly broad definition of what illegal insider trading is because there are lots of tricky and secretive ways in which people can contrive to try and cheat in the markets and that a broad definition that would cover O’Hagan, for example, is necessary or else cheating in the markets will be widespread, and people won’t be confident that they’re not playing against someone with a stacked deck.
CHARLAYNE HUNTER-GAULT: And how did the justices react?
STUART TAYLOR: They were–they asked a lot of tough hypothetical questions. Chief Justice Rehnquist in particular seemed skeptical of the government’s position. He’s traditionally wanted a narrow definition of securities fraud. Justice O’Connor asked some questions about family situations.
For example, she said, suppose a man’s daughter, a company–suppose a man’s daughter overhears him using inside information and she runs out and makes a big profit. Does that violate the securities laws? The answer to that was, well, no, probably not if she just overheard it, but if he gave her the information deliberately, hoping to make a big profit for her, then it would violate the securities laws.
And the game here was the government doesn’t want to make it sound like they’re defining it so broadly that it’s unlimited but they want to define it broadly enough to catch people like O’Hagan.
CHARLAYNE HUNTER-GAULT: And how about O’Hagan’s lawyers?
STUART TAYLOR: O’Hagan’s lawyer, John French, basically–his first argument was hey, he didn’t do this. He heard market rumors. He read stuff in the “Wall Street Journal.” He figured out that maybe Pillsbury was likely to get taken over. And that’s how he did it.
But the jury didn’t buy that, and the justices didn’t give him short shrift, so when they focused him on the legal issue, he said, even if he did exactly what the jury found, it isn’t illegal, it wasn’t securities fraud, at least under any federal law, because Congress has never passed a law that says you can’t do that.
CHARLAYNE HUNTER-GAULT: So, briefly, what could the outcome of this be?
STUART TAYLOR: If he the SEC loses big and the Supreme Court does exactly what the lower court did–
CHARLAYNE HUNTER-GAULT: Throws the case out.
STUART TAYLOR: –according to the SEC–throws the whole case out–according to the SEC, it would cripple its ability to enforce the laws against insider trading, and they would clearly have to go to Cong
ress to ask for a new statute, which a lot of people think is what should happen. If the SEC wins big, then they have a very big stick that they can use to go after all sorts of people for whatever the SEC thinks is securities fraud, it’s possible that both the SEC and O’Hagan could end up unhappy, because one of the counts against him is mail fraud. If the Supreme Court says, yes, we’re going to send him to prison for mail fraud but, no, we’re not going to call it securities fraud, the SEC won’t be happy and O’Hagan won’t be happy either.
CHARLAYNE HUNTER-GAULT: So Congress ultimately may have to do some more–some new legislation on this?
STUART TAYLOR: The SEC will certainly ask for it if they lose big in the Supreme Court.
CHARLAYNE HUNTER-GAULT: All right. Well, we’ll see. Thank you, Stuart.
STUART TAYLOR: Thank you.