There was a guy, a guy we'll keep anonymous (this case does involve Alcoholics Anonymous, after all) who was an insider at the Philadelphia Consolidated Holding Corporation ("PHLY"). In mid-2008, he had a few relapses, and when he returned to AA, his long-time AA confidant, Timothy McGee, asked about the absences. The insider blurted out that he was stressed about work because PHLY was about to sell at three times its book value: $61.50.
McGee, as you have probably already guessed, went out and bought as much of PHLY's stock as possible, flipping the stock after the acquisition announcement for about $290,000 in profit. The SEC noticed the suspicious transactions, asked him about it, and eventually, McGee was convicted of insider trading and perjury under a misappropriation theory.
McGee challenged his conviction, arguing that AA mentorship falls outside of the "recognized dut[ies]" and relationships that can support such a conviction.
Evolution of Recognized Relationships of Confidence
In O'Hagan, the U.S. Supreme Court offered the vague guidance of limiting criminal liability for misappropriation to "recognized dut[ies]." Unsurprisingly, this led to "inconsistent treatment" among the circuit courts on which duties and/or relationships qualified. For example, is it limited to fiduciary duties, like the one in O'Hagan? Or does it extend all the way to AA confidants, or even further, to "World of Warcraft" buddies?
The SEC, seeking to clarify things a bit, promulgated their own rule, 17 C.F.R. § 240.10b5-2(b), which includes (in relevant part):
"Whenever the person communicating the material nonpublic information and the person to whom it is communicated have a history, pattern, or practice of sharing confidences, such that the recipient of the information knows or reasonably should know that the person communicating the material nonpublic information expects that the recipient will maintain its confidentiality."
McGee argues that O'Hagan along with its predecessor cases, limited the misappropriation relationships to those with a fiduciary duty. The Third Circuit disagreed.
Ambiguous Precedent Can't Trump Agency Rules
"In O'Hagan, though the defendant's duty to disclose undoubtedly arose from his position as a fiduciary, the Court stressed that misappropriation liability extends to 'those who breach a recognized duty,'" Judge Ruggero Aldisert wrote. "The Court did not unambiguously define recognized duties or cabin such duties to fiduciary relationships. The Court painted with a broader brush, referring to the requisite relationship as a 'fiduciary or other similar relationship,' an 'agency or other fiduciary relationship,' a 'duty of loyalty and confidentiality,' and a 'duty of trust and confidence.'
"Hence, it bears reemphasis that '[o]nly a judicial precedent holding that the statute unambiguously forecloses the agency's interpretation, and therefore contains no gap for the agency to fill, displaces a conflicting agency construction.'" (Quoting Brand X.)
As noted, O'Hagan was ambiguous enough to confuse lower courts and necessitate the SEC rule, which means it doesn't foreclose the SEC's broad interpretation -- an interpretation which apparently includes Alcoholics Anonymous acquaintances.
- United States v. McGee (FindLaw's Caselaw)
- Decades-Old Ban on Philly Cops' Campaign Contributions Struck Down (FindLaw's U.S. Third Circuit Blog)
- Prisoners Deserve Notice Before State Takes Their Funds: 3rd Cir. (FindLaw's U.S. Third Circuit Blog)