This month the Securities and Exchange Commission is planning on finalizing regulations that will require registration and more exacting oversight of financial advisors to municipalities and cities involved in bond offerings.
Recently in SEC Enforcement Actions Category
Here is an update to our October 8, 2012 post about an insider trading case involving information received at an Alcoholics Anonymous ("AA") meeting.
On November 15, 2012, a jury in the Eastern District of Pennsylvania found Timothy McGee guilty of insider trading based on his use of information he received from a fellow member of his AA group. McGhee was a financial adviser for Ameriprise Financial Services Inc. As you may recall, a corporate executive of Philadelphia Consolidated Holding Corporation ("PHYL") who was also a member of McGhee's AA group spoke to McGhee about his struggles arising out of the stress created by the pending acquisition of PHYL. McGee used that knowledge to purchase PHYL stock in advance of the acquisition transaction, netting almost $300,000 after the company went public. In less than four hours, a jury determined that McGee was guilty of acting on insider information. Sentencing has been scheduled for February 20, 2013 and McGee could face up to 25 years in prison. In addition, McGee also faces a civil suit, which had been stayed pending the outcome of the criminal trial, based on the $1.5 million that others netted from his disclosure of the information.
Using information learned from a fellow Alcoholics Anonymous ("AA") member to make money in the stock market may be morally dubious. Should it be a federal crime, however? A recent case in the Eastern District of Pennsylvania, United States v. McGee, Crim. No. 12-236, deals with this very question.
The defendant, Timothy McGee, was a member of AA. He and a senior executive of Philadelphia Consolidated Holding Corporation ("PHYL") formed a close personal relationship while attending AA meetings, whereby they shared confidences in their struggles with alcoholism. The senior PHYL executive revealed to McGee that he was under a great deal of stress due to the pending acquisition of PHYL. McGee then purchased shares of PHYL which he sold for a $292,128.00 profit after the acquisition was announced. McGee was indicted for insider trading.
There are two bases for insider trading. The first is the classic situation where a corporate insider trades in securities using material, nonpublic information he or she obtains as a result of his or her insider position. The second, the misappropriation theory, occurs when an outsider, who has a "duty of loyalty and confidentiality" to an inside source of nonpublic information, uses information learned from that insider to trade in securities. Determining the existence of such "a duty of loyalty and confidentiality" is tricky. To help define when such "duty of loyalty and confidentiality" exists, the SEC promulgated Rule 10b5-2, codified at 17 C.F.R. 240.10b-5. According to Rule 10b5-2(b)(1) and (2), such duty arises where there is an agreement to keep the information confidential, and/or when the parties 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." In order to prove a violation of the misappropriation theory, the government must prove that the defendant knew that his conduct was unlawful.
In McGee, the government contended that, as part of AA's tradition, AA members agree to keep information they share confidential. The government further contended that there existed a history of shared confidences between McGee and the insider. Thus, the government argued, McGee had a "duty of loyalty and confidentiality" to keep information learned form the insider confidential. McGee moved to dismiss, arguing that there existed no duty precluding him from trading on the information and that he did not know that he was breaking the law when he traded on the information. The court denied the motion and held that the jury would have to decide whether McGee's relationship with the corporate insider featured a "duty of loyalty and confidentiality" and whether the information about the acquisition was disclosed within the confines of that relationship.
The Dodd-Frank Act authorized the SEC to make awards to whistleblowers who provide information that leads to an enforcement action resulting in $1 million or more in sanctions. The SEC whistleblower program began operating in August 2011. The SEC, through its Chairwoman Mary L. Schapiro, was a staunch advocate for the creation of the program.
The SEC has recently announced its first whistleblower award. And by awarding a maximum 30% share of its recovery, the SEC has certainly "put its money where its mouth is." According to the SEC's press release, the whistleblower (whose identity is protected by law) "provided documents and other significant information that allowed the SEC's investigation to move at an accelerated pace and prevented the fraud from ensnaring additional victims." In the enforcement action resulting form the whistleblower's information (which is not identified) a court has ordered more than $1 million in sanctions and may enter future awards against additional parties. The whistleblower will receive 30% of the sanctions paid to the SEC. To date, the SEC has been paid $150,000 and the whistleblower will therefore initially receive $50,000. The SEC denied recovery to a second whistleblower in the enforcement action because the information that person provided "did not lead to or significantly contribute to the SEC's enforcement action."
The relatively small $50,000 award to this first whistleblower should not obscure the fact that the whistleblower program will lead to many future enforcement actions. The SEC is currently receiving eight whistleblower tips a day. That the first whistleblower award was made within a year of the program's start suggests that the SEC is aggressively following up on these whistleblower tips. We should expect to see many more whistleblower awards in the near future.