Don't Ask, Just Tell: Insider Trading after United States v. O'Hagan

Since the 1960s, federal courts have uniformly held that Section 10(b) of the Securities Exchange Act of 1934 prohibits corporate insiders from trading in a corporation's stock without first disclosing material, nonpublic information to the shareholders with whom they trade. Until the summer of 1997, however, the US Supreme Court avoided deciding when a person who is not a corporate insider is forbidden from trading on material, nonpublic information. Some courts, at the urging of the SEC, have developed a theory, known as the misappropriation theory, under which certain corporate outsiders are prohibited from trading on the basis of material, nonpublic information. The Court purported to decide this issue last summer in US v. O'Hagan (1997) but instead rendered a confusing opinion that left many questions unanswered. It is argued that the SEC's victory in O'Hagan will suppress the much-needed clarification of insider trading laws by encouraging both the SEC and Congress to continue with the approach they have adhered to for decades - leaving Section 10(b) alone while the courts continue to develop a common law of insider trading.