U.S. v. O'Hagan, s. 94-3714

• Decision Date: 01 April 1998
• Docket Number: 94-3856,Nos. 94-3714,s. 94-3714
• Parties: Fed. Sec. L. Rep. P 90,178 UNITED STATES of America, Appellee-Cross-Appellant, v. James Herman O'HAGAN, Appellant-Cross-Appellee. Securities and Exchange Commission, Amicus on Behalf of Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 641

139 F.3d 641

Fed. Sec. L. Rep. P 90,178

UNITED STATES of America, Appellee-Cross-Appellant, v. James Herman O'HAGAN, Appellant-Cross-Appellee Securities and Exchange Commission, Amicus on Behalf of Appellee.

Nos. 94-3714, 94-3856.

United States Court of Appeals,

Eighth Circuit.

Submitted Oct. 20, 1997.

Decided April 1, 1998.

John Dwyer French, Minneapolis, MN, argued (Elizabeth L. Taylor and Timothy C. Rank, on the brief), for Appellant.

Henry Joseph Shea, Asst. U.S. Atty., Minneapolis, MN, argued (Christopher L. Bebel, on the brief), for Appellee.

Before FAGG, LAY, and HANSEN, Circuit Judges.

HANSEN, Circuit Judge.

This case comes to us for a second time following a remand to this court by the United States Supreme Court in United States v. O'Hagan, 521 U.S. 642, ----, 117 S.Ct. 2199, 2220, 138 L.Ed.2d 724 (1997). In our prior opinion, United States v. O'Hagan, 92 F.3d 612 (8th Cir.1996), we reversed defendant James Herman O'Hagan's convictions for securities fraud, mail fraud, and money laundering. The Supreme Court reversed that decision, holding that: (1) a defendant could be convicted of securities fraud based on the "misappropriation theory"; and (2) the Securities and Exchange Commission (SEC) had the authority to prohibit acts which were not themselves fraudulent under the common law or § 10(b) of the Exchange Act. O'Hagan, 521 U.S. at ---- - ----, ----, 117 S.Ct. at 2213-14, 2217. The Court remanded the case to us, leaving for us to resolve a number of issues we had not reached in our first decision. Id. at ----, 117 S.Ct. at 2220. These issues include O'Hagan's numerous arguments for reversal of his convictions and challenges to his sentences. We also now address the government's cross-appeal asserting errors in sentencing. We affirm O'Hagan's securities fraud and mail fraud convictions, leave undisturbed our prior reversal of his money laundering convictions, and remand to the district court for resentencing.

I. Factual and Procedural Background

O'Hagan was a senior partner in the 275-lawyer Dorsey & Whitney law firm in Minneapolis, Minnesota, specializing in medical malpractice and securities law cases. From July 1988 through September 1988, Dorsey & Whitney was local counsel representing Grand Metropolitan PLC (Grand Met), a company based in London, England, regarding a contemplated tender offer for the common stock of the Pillsbury Company (Pillsbury), headquartered in Minneapolis.

On August 18, 1988, O'Hagan began purchasing call options for Pillsbury stock, each option giving him the right to purchase 100 shares of Pillsbury stock by a certain date at a specified price. Later in August and in September, he made additional purchases of Pillsbury call options. By the end of September, O'Hagan owned 2,500 unexpired Pillsbury call options, more than any other individual investor in the world. O'Hagan also purchased 5,000 shares of Pillsbury common stock in September 1988. O'Hagan's wholesale purchases of Pillsbury options represented a major shift from his previous avoidance of high risk option trading. The evidence showed O'Hagan mortgaged his home to purchase some of them.

On October 4, 1988, Grand Met publicly announced its tender offer for Pillsbury stock. The price of Pillsbury stock immediately rose from $39 per share to almost $60 per share. Shortly after the announcement, O'Hagan exercised his options, buying Pillsbury stock at the lower option price, and then sold this stock at the higher market price generated by the tender offer. O'Hagan also sold the 5,000 shares of common stock that he had purchased in September at the lower preoffer price. O'Hagan realized a profit of over $4 million from these securities transactions.

O'Hagan later was charged in a 57-count indictment for mail fraud, securities fraud, and money laundering. Counts 1-20 charged him with mail fraud in violation of 18 U.S.C. § 1341 (1988). Counts 21-37 charged him with securities fraud in violation of § 10(b) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78ff(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1997), promulgated thereunder. Counts 38-54 charged O'Hagan with securities fraud in violation of § 14(e) of the Exchange Act, 15 U.S.C. §§ 78ff(a), 78n(e), and Rule 14e-3, 17 C.F.R. § 240.14e-3(a) (1997), promulgated thereunder. Counts 55-57 alleged various violations of the federal money laundering statutes, 18 U.S.C. §§ 1956(a)(1)(B)(i) and 1957. The indictment alleged that O'Hagan defrauded Dorsey & Whitney and its client, Grand Met, by using for his own securities trading purposes material, nonpublic information regarding Grand Met's planned tender offer. The indictment also alleged that O'Hagan used the profits he gained during this trading to conceal his previous embezzlements and conversions of Dorsey & Whitney's clients' trust funds.

A jury convicted O'Hagan on all 57 counts, and he was sentenced to 41 months' imprisonment. The district court gave O'Hagan credit for 23 of the 30 months he served in state prison for state law convictions arising from his theft of the client trust funds. O'Hagan then appealed his convictions and sentences. We initially reversed O'Hagan's convictions on all counts. O'Hagan, 92 F.3d at 628. The Supreme Court then granted certiorari, United States v. O'Hagan, --- U.S. ----, 117 S.Ct. 759, 136 L.Ed.2d 695 (1997), reversed this court's judgment as to all counts except the money laundering counts, and remanded this case for further proceedings. O'Hagan, 521 U.S. at ----, 117 S.Ct. at 2220.

II. Money Laundering Convictions

In our initial opinion, we reversed O'Hagan's convictions for money laundering and the government did not seek review of that ruling by the Supreme Court. O'Hagan, 521 U.S. at ---- n. 24, 117 S.Ct. at 2219 n. 24. Thus, the Supreme Court left undisturbed that portion of our prior opinion. Id. Therefore, O'Hagan's money laundering convictions remain reversed. We now address the parties' arguments that were not resolved in our prior opinion and which were reserved to us in the Supreme Court's opinion.

III. Rule 10b-5 Securities Fraud Convictions

O'Hagan argues that his convictions for securities fraud in violation of Rule 10b-5 must be reversed because the government failed to prove that he "willfully" violated the rule. O'Hagan claims that in order to prove willfulness, the government must establish that he both knew what acts Rule 10b-5 prohibited and that he intentionally committed acts in violation of the rule. Section 32 of the Exchange Act provides, in relevant part:

Any person who willfully violates any provision of this chapter ... or any rule or regulation thereunder the violation of which is made unlawful ... shall upon conviction be fined not more than $100,000, or imprisoned not more than five years, or both ...; but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.

15 U.S.C. § 78ff(a) (1987). ¹

O'Hagan bases his argument on the following language from the Supreme Court's opinion in this case:

Vital to our decision that criminal liability may be sustained under the misappropriation theory, we emphasize, are two sturdy safeguards Congress has provided regarding scienter. To establish a criminal violation of Rule 10b-5, the Government must prove that a person "willfully" violated the provision. See 15 U.S.C. § 78ff(a). Furthermore a defendant may not be imprisoned for violating Rule 10b-5 if he proves that he had no knowledge of the rule. See ibid.

O'Hagan, 521 U.S. at ----, 117 S.Ct. at 2214 (footnote omitted).

Contrary to O'Hagan's present claim, we think it is clear that the Supreme Court was simply explaining that the statute provides that a negligent or reckless violation of the securities law cannot result in criminal liability; instead, the defendant must act willfully. See 15 U.S.C. § 78ff(a). The Court also explained that the defendant has an affirmative defense to imprisonment if he proves he did not know of the rule or regulation pursuant to which he was convicted. See id. O'Hagan offered no such proof at trial or sentencing. Contrary to O'Hagan's claim, the Supreme Court, in holding that the misappropriation theory could be a basis for criminal liability under Rule 10b-5, did not create a requirement that a defendant know that his acts were in violation of Rule 10b-5. We must therefore interpret § 32 to determine what the term "willfully" requires.

The meaning of the term "willfully" varies with the context in which the term is used. See Ratzlaf v. United States, 510 U.S. 135, 141, 114 S.Ct. 655, 126 L.Ed.2d 615 (1994); (" 'Willful,' as this Court has recognized, is a 'word of many meanings,' and 'its construction [is] often ... influenced by its context.' ") (quoting Spies v. United States, 317 U.S. 492, 497, 63 S.Ct. 364, 367, 87 L.Ed. 418 (1943) (alteration and ellipses in original)). Although O'Hagan cites cases recognizing that "willfully" sometimes requires knowledge that one's acts are in violation of the law, these cases are an exception to the "general rule that ignorance of the law or a mistake of law is no defense to criminal prosecution." Cheek v. United States, 498 U.S. 192, 199-200, 111 S.Ct. 604, 609, 112 L.Ed.2d 617 (1991) (explaining that the Court "carv[ed] out an exception" to the general rule for criminal income tax offenses because of the "complexity of the tax laws"); Ratzlaf, 510 U.S. at 143-46, 114 S.Ct. at 660-62 (explaining that because illegal cash transaction structuring is not "inevitably nefarious" and could occur for a benign reason, a willful violation requires the defendant's knowledge that his acts violate the law). The rationale of Cheek and Ratzlaf, that knowledge of the law is required in order to prevent criminal conviction for conduct that may often be innocently undertaken, does not apply to § 32. Criminal conviction for violation of rules and regulations...