U.S. v. O'Hagan (U.S. 1997)

In O’Hagan, the Supreme Court endorsed the so-called “misappropriation theory” of insider trading liability under rule 10b-5, and upheld rule 14e-3.

Questions:

1. The misappropriation theory rests 10b-5 liability on deceiving the source of the information. What exactly is the deception, and does it occur “in connection with the purchase or sale of any security” (see Exchange Act §10(b) and rule 10b-5)?
2. Does rule 14e-3 expand liability beyond rule 10b-5? If so, what is the statutory basis for the expansion?
3. Did O’Hagan overrule Chiarella and Dirks?

a. Could the defendant in Chiarella have been convicted under O’Hagan’s theory of rule 10b-5? If so, why wasn’t he? Hint: re-read part IV of Chiarella.
b. Could the defendant in Chiarella have been convicted under rule 14e-3? If so, why wasn’t he?
c. Does O’Hagan’s misappropriation theory of 10b-5 insider trading liability replace the “classical theory” as endorsed and applied by Chiarella and Dirks—liability premised on a duty to the shareholders of the corporation whose shares are being traded? Or are the two theories complementary? What behavior would violate rule 10b-5 under the classical theory but not under the misappropriation theory?