Broad Definition of ‘Insider’ Is Sought

With the government’s authority to prosecute insider trading as extensively as it would like at stake, Clinton administration lawyers urged the Supreme Court on Wednesday to make it illegal for anyone--not just corporate executives--to use deceit and secret tips to profit in stocks.

“Information is the lifeblood of the securities markets . . . [and] investors rely on the fact that the markets are essentially honest,” Deputy U.S. Solicitor Gen. Michael R. Dreeben told the court. If a few investors can trade on secret tips, it could destroy the public’s trust in the markets, he said.

The issue remains in doubt because Congress has failed to write a law that spells out who is barred from trading on inside information. For that reason, a federal appeals court last year overturned the conviction of a Minneapolis lawyer who made a $4.3-million profit in six weeks after buying up Pillsbury stock before a takeover bid.

James O’Hagan, the defendant, heard from a law partner that the firm was working on behalf of a British company that sought to buy Pillsbury, the baking goods company. O’Hagan, who had stolen as much as $1 million from his client’s accounts and apparently needed a cash infusion in a hurry to make up for the thefts, secretly used the tip to buy up Pillsbury stock, which rose by 50% after the buyout became public.

After he served a 30-month state prison term for a conviction related to the thefts, federal prosecutors won convictions against him for mail fraud, illegal trading during a tender offer and trading on inside information.

But last year, the U.S. Circuit Court of Appeals in St. Louis voided the federal case against O’Hagan. Since O’Hagan did not work for Pillsbury as an employee or a lawyer, he had no “fiduciary duty” to its stockholders and laws against insider trading did not apply to him, the court said.

Normally, the court is reluctant to uphold criminal charges unless the law is clear. Indeed, Chief Justice William H. Rehnquist quickly declared that he was skeptical of the government’s case.

“Isn’t it unusual to have a criminal statute that is so open-ended?” he asked. The Minneapolis lawyer may have been deceitful with his law partners but “he didn’t deceive anyone who sold him the securities,” Rehnquist said.

But most of the justices sounded willing to reinstate at least some of the convictions.

Justice Antonin Scalia noted that Congress passed a law in 1968 empowering the Securities and Exchange Commission to go after “any person” who engages “in any fraudulent, deceptive acts” during “any tender offer,” referring to the period when bidders are seeking to buy out a company’s stock.

A stock’s price often jumps when a buyer announces plans to take over a company, and the law allows prosecutors to go after lawyers, accountants, stock traders or others who hear about the takeover plan in advance and use the information to profit.