In the United States v. James Herman O'Hagan case of 1996, the U.S Supreme Court ruled that a person who trades securities for personal profit using confidential information is guilty of fraud under Section 10(b) and Rule 10b-5 of the Securities Exchange Act. The defendant, James Herman O'Hagan, was an attorney at a law firm representing Grand Metropolitan PLC during its tender offer for Pillsbury Company's shares. Without disclosing it to his firm or client, he purchased options in Pillsbury stock which he later sold after the public announcement of Grand Met’s bid for substantial profits. He was charged with mail fraud, securities fraud and money laundering but argued that his actions did not constitute "fraud" as defined by federal laws because he had no fiduciary duty to shareholders whose stocks were traded based on nonpublic information about upcoming transactions involving their shares. However, this argument was rejected by the court stating that misuse of confidential information qualifies as fraudulent activity under federal law.

In the dissenting opinion for United States v. James Herman O'Hagan, Justice Scalia argued that the majority's decision expanded federal securities law beyond its intended scope by criminalizing deceptive practices not directly related to buying or selling securities. He contended that misappropriation theory was inconsistent with Section 10(b) of the Securities Exchange Act and Rule 10b-5 because it did not involve any deception upon purchasers or sellers of securities, but rather a breach of duty owed to another party (in this case, O'Hagan's law firm). Furthermore, he criticized the majority for creating an "open-ended" and "unpredictable" standard which could potentially cover any fraudulent behavior in connection with a purchase or sale of securities. In his view, such broad interpretation would lead to arbitrary enforcement and uncertainty in business transactions.