Pragmatism Returns to the Law in Insider Trading

Abstract

This article assesses the significance of the Supreme Court's opinion in United States v. O'Hagan, 117 S.Ct. 2199 (1997). It reviews critically the history of the misappropriation theory of insider trading, highlighting the doctrinal tensions both between Santa Fe Industries v. Green and Chiarella v. U.S. and within Chiarella and Dirks v. SEC. The article then details how, in the course of arguing O'Hagan to the Court, the government developed an explanation ofhow misappropriation can involve informational fraud. One significant doctrinal aspect of O'Hagan was the Court's endorsement of the government's informational fraud theory, a move that also served to reconcile Santa Fe and Chiarella. More significantly, though, the Court resolved the doctrinal tensions within Chiarella and Dirks by explicitly relying on considerations of public policy to explain its support of the misappropriation theory. This, in the author's view, represented a welcome change from the more wooden modes of analysis the Court employed in two other recent decisions interpreting the federal securities laws.