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Court upholds trading law
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June 25, 1997: 8:11 p.m. ET
Justices rule that using confidential information in trading is illegal
From Correspondent Charles Molineaux
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NEW YORK (CNNfn) - The Supreme Court Wednesday upheld one of the government's most often used weapons to fight insider trading.
In a 6-3 decision, justices said the government correctly interpreted federal securities laws when it made it a crime to use confidential information in securities trading.
Joining Justice Ruth Bader Ginsburg, who wrote the opinion, were Justices John Paul Stevens, Sandra Day O'Connor, Anthony M. Kennedy, David H. Souter and Stephen G. Breyer.
Dissenting were Chief Justice William H. Rehnquist and Justices Clarence Thomas and Antonin Scalia.
The decision is the first big legal verification of a theory the U.S. Securities and Exchange Commission developed in the early 1980s that using inside information to trade a company's stock is illegal, even if the trader doesn't work for the company.
It's a crucial victory for the SEC that will affect future cases. William McLucas, enforcement director at the SEC, said a reversal of the rule would have affected hundreds of cases it has already prosecuted.
"This theory has been used in probably 40 to 45 percent of our cases over the past five years," he said.
The ruling reinstates the securities fraud conviction of Minneapolis lawyer James O'Hagan. O'Hagan received confidential information that a client was planning a takeover of Pillsbury. O'Hagan then made $4 million investing in the company's stock.
An appeals court reversed the conviction because O'Hagan didn't actually work for the company whose stock he traded.
Ginsberg wrote that kind of trading handicaps regular investors.
"It is a disadvantage that cannot be overcome with research or skill," she wrote.
The SEC said this applies to lawyers, therapists or anyone else who gets information confidentially from a position of trust, but not to others like cabbies or bartenders who just happen to be at the right place at the right time.
"A simple overhearing of information in an elevator, if that's what really happened, doesn't amount to a deceptive misappropriation," said John Coffee, a law professor at Columbia University.
David Brodsky, a securities lawyer at Schulte Roth & Zabel, said the decision can also protect some analysts by drawing a line between insider trading and a little aggressive research. (91K WAV) or (91K AIFF)
The court said in the securities world, what it termed "informational disparity" is inevitable, but justices said investors would hesitate to risk their money in a market where the law did nothing to stop trading based on misappropriated information.
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