Securities Conviction Affirmed Where Info Was Obtained Through AA Relationship
In U.S. v. McGee, 2014 WL 3953647 (August 14, 2014), an insider trading conviction was upheld based upon a duty of trust or confidence where no actual fiduciary relationship existed.
The U.S. Court of Appeals for the Third Circuit, in U.S. v. McGee, 2014 WL 3953647 (August 14, 2014), held that an AA mentor is in a “relationship of trust or confidence” that gives rise to insider trading liability.
In appealing his conviction for insider trading, appellant Timothy McGee challenged the SEC’s power to promulgate the rule that he was prosecuted under and claimed that it was invalid because it allows for criminal liability absent any “insider” or fiduciary relationship with the source.
Federal Criminal Defense Attorney Hope C. Lefeber explains how this case may open the floodgates for future insider trading prosecutions under Rule 10(b)(5) –2(b)(2).
According to court documents, Appellant McGee met Maguire at Alcoholic’s Anonymous, where they attended meetings between 1999-2001. Thereafter, for the better part of a decade, McGee informally mentored Maguire, and both men shared intimate confidences.
In 2008, Maguire had relapsed and had missed multiple meetings. When he eventually returned, McGee spoke with him about his absence and offered support.
In response, Maguire opened up to McGee about the pressures of work and “blurted out” that his publically traded corporation was in the process of a stressful buyout.
Upon hearing this information, McGee immediately took out a substantial loan and purchased a large quantity of shares, which doubled in value once the buyout was publically announced.
McGee was convicted of insider trading in the District Court, 955 F.Supp. 2d 466 (E.D. Pa. 2013). On appeal, he challenged the SEC’s power to promulgate the rule that he was prosecuted under.
He claimed that insider trading occurs when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information.
Because McGee had no connection to the corporation, he claimed that he could not be prosecuted for using the insider information.
The Third Circuit disagreed. The Court ruled that the meaning of SEC Rule 10(b)(5) –2(b)(2) was not clear from its wording
As Ms. Lefeber explains, this triggered the doctrine of “Chevron deference,” in which a court defers to the agency’s interpretation of an ambiguous provision.
“This precedent will open the floodgates for prosecutions arising from myriad relationships which previously have not been considered sufficient for federal prosecutions.” Hope Lefeber
Since the SEC created the provision in question, the Court deferred to the SEC’s interpretation of the rule. And under this interpretation, insider trading arises when a person misappropriates confidential information for securities trading purposes, in breach of a duty [to disclose] owed to the source of the information.
The Court had no hesitation in labeling McGee and Maguire’s relationship within AA as one based on trust and confidence because the duty of trust or confidence arose from a “history, pattern, or practice of sharing confidences”. Accordingly, McGee’s conviction of insider trading was upheld.
Ms. Lefeber believes that this precedent will open the floodgates for prosecutions arising from myriad relationships which previously have not been considered sufficient for federal prosecutions. Acknowledging the expansiveness of the new rule of law articulated in this case, the Third Circuit noted “[a]lthough we are not without reservations concerning the breadth of misappropriation under Rule 105b–2(b)(2), it is for Congress to limit its delegation of authority to the SEC or to limit misappropriation by statute.” This may never happen.
She is recognized by Superlawyers and is ranked by the National Trial Lawyers as one of the top 100 Criminal Defense Lawyers in the United States.
Ms. Lefeber’s key areas of practice include criminal defense in business and corporate fraud, mail and wire fraud, money laundering, tax fraud and other white collar crimes, conspiracy and drug offenses.
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