The SEC recently brought charges against Timothy McGee, who allegedly obtained insider information from an executive at Philadelphia Consolidated Holding Corp. who confided in McGee. While ordinary friendship may not rise to the level of a relationship of trust and confidence, in this case, the SEC claims that both individuals were members of Alcoholics Anonymous (“AA”), which played a role in the communication of confidential information from one individual to another. The SEC also charged four other people, whom McGee tipped about the information.
Under the misappropriation theory of insider trading, as laid out in United States v. O’Hagan, an individual commits securities fraud under Section 10(b) and Rule 10b-5 if he misappropriates confidential information used to trade securities in breach of a duty owed to the source of the information – a duty to keep the information confidential and not to use it for his personal benefit.
The SEC laid out the nature of A.A. in its complaint, noting, “Individuals who participate in AA and share information at meetings or in private discussion with other AA members are asked to abide by a policy of anonymity, which is the ‘Twelfth Tradition’ of AA.” The SEC further emphasized the confidentiality of information shared at AA meetings. Although the SEC also noted that the individuals’ friendship extended beyond AA, it seems the SEC placed great emphasis on the nature of the AA program and the confidentiality it requires. The duty of trust and confidence in the SEC’s complaint was built on the individuals’ participation in AA and the relationship that developed because of their participation in AA. This case marks an interesting development in securities law – the SEC may use an individual’s membership in a program like AA to help build its case that the individual owed a duty of trust and confidence to the source of the inside information.
Read the SEC’s press release here.