Federal prosecutors can continue to press insider- trading charges against people who aren't true company insiders, the Supreme Court ruled Wednesday.
The nation's highest court refused to rein in the government's power to pursue charges against investors who profit from inside information about a company, yet have no formal connection to that company.
The justices ruled in one of the most closely watched business cases of the year, and settled a long-running legal dispute over the scope of U.S. insider-trading laws.
They overturned a federal appeals court decision, which threw out the 57-count conviction of a Minneapolis lawyer who was accused of making $4.3 million by trading on confidential information about a planned takeover bid for Pillsbury Co.
The appeals court said James Herman O'Hagan couldn't be prosecuted because he learned about the secret takeover plans from a lawyer for the buyer, Grand Metropolitan PLC. Because Mr. O'Hagan had no formal connection or obligation to Pillsbury, the appeals court said, he couldn't be accused as an insider for trading that company's stockand options.
The Supreme Court, in an opinion by Justice Ruth Bader Ginsburg, said that under the law it was enough that O'Hagan deceived his law firm, which represented Grand Met, by using information about the pending takeover to make a profit.
The Securities and Exchange Commission and the Justice Department had argued it would "critically weaken" their ability to stem stock market abuses if the government's main securities fraud statute were limited to stock traders who have a direct, legal responsibility to a company or its shareholders.
The legal fight centered on the government's "misappropriation theory" of insider trading.
Under this theory, the government may prosecute anyone who trades on nonpublic information they've "misappropriated" from the rightful owner of that information, regardless of whether they have any connection to the company whose stock is being purchased.
In addition, the high court reinstated mail fraud convictions against Mr. O'Hagan. The appeals court had thrown out those charges, saying that if the lawyer's insider trading wasn't illegal to begin with, then it wasn't against the law to use the mail to further the alleged scheme.
The Justice Department argued that mail fraud is a different crime, involving different allegations, and shouldn't be disallowed just because the securities-related convictions were overturned.
The St. Louis-based U.S. Court of Appeals for the Eighth Circuit, in the O'Hagan case, was the second of the country's regional federal appellate courts to reject the government's theory on insider trading.
Three other appeals courts, however, had upheld the government's broad insider power. The case is U.S. v. O'Hagan, 96-842.