Another insider-trading case has survived a motion to dismiss under the more stringent standards that the Second Circuit adopted last year in United States v. Newman. On May 12, 2015, a federal District Court in Massachusetts declined to dismiss the indictments in United States v. McPhail and held that the Government had alleged sufficient facts showing that the initial wrongdoer-tipper had received a personal benefit and that the tippee had known of that benefit.
The McPhail case involved allegedly material, nonpublic information that an unidentified corporate executive had provided to McPhail. The executive and McPhail had allegedly had a “close relationship” and a “history, pattern and practice of sharing professional and personal confidences” such that the executive had reason to believe that McPhail would not disclose the confidences. The executive was therefore not accused of wrongdoing. McPhail, however, allegedly told several of his “golfing buddies” – including Parigian – about the information he had received from the executive, “with the intent that his friends [would] profit from buying and selling [company] shares or options on such shares on the basis of inside information.”
The Government indicted McPhail and Parigian under the misappropriation theory of insider trading, contending that McPhail had breached a duty of trust and confidence to the executive by misappropriating the information disclosed to him – and that McPhail had then tipped Parigian, who had allegedly been aware of McPhail’s relationship with the executive and had known “or should have known” that McPhail had received the inside information “in violation of a fiduciary or similar duty.” The indictment also alleged that Parigian had known that “McPhail expected to receive and received a benefit from disclosing the inside information to Parigian.”
The defendants moved to dismiss the indictment, but the court denied the motion “even in light of the persuasive weight of the Second Circuit’s recent decision in United States v. Newman.”
First, the court held that, under the misappropriation theory, the personal-benefit requirement applies to the first wrongdoer, rather than to the innocent source of the information (i.e., the executive, who had believed that his relationship with McPhail would prevent McPhail from disclosing the inside information). The court held that the indictment sufficiently alleged that McPhail had received or would receive a personal benefit for breaching his duty to the executive (although the court’s opinion did not describe the nature of that benefit).
Second, the court ruled that the relationship “between an insider and the tipster . . . need not be a fiduciary one per se, but a fiduciary-like relationship.” The court relied on the Third Circuit’s 2014 decision in United States v. McGee, which upheld the SEC’s Rule 10b5-2(b)(2) concerning duties of trust and confidence.
Third, the court concluded that the indictment sufficiently alleged that Parigian had known that McPhail would receive or expected to receive a personal benefit.
Fourth, the court rejected Parigian’s argument that the Government’s failure to indict McPhail’s “other golfing buddies” amounted to selective prosecution of Parigian. The court concluded that, even if it were to assume that the “other golfing buddies” were similarly situated to Parigian, the Government could base its charging decisions on the alleged facts that Parigian had realized greater profits and avoided greater losses than had the others and that Parigian had allegedly made false statements to federal law-enforcement officers about his trading.
We will continue to watch post-Newman developments.
We have covered the Newman decision continuously:
- Court Upholds SEC’s Insider-Trading Complaint and Questions Second Circuit’s Newman Decision
- Second Circuit Denies DOJ’s Request for En Banc Review of Newman; Leaves Landmark Insider Trading Decision in Place
- Third Congressional Proposal to Define Insider Trading
- After Newman, Congress Seeks to Define Insider Trading
- Government Seeks Rehearing in Landmark Insider-Trading Case
- Personal Benefit Required Under Misappropriation Theory of Insider Trading
- Second Circuit Clarifies Elements of Tippee Liability for Insider Trading