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United States v. McPhail

United States Court of Appeals, First Circuit

July 26, 2016

ERIC MCPHAIL, Defendant, Appellee.


          William J. Cintolo, with whom Thomas R. Kiley, and Cosgrove Eisenberg & Kiley, PC, were on brief, for appellant.

          Andrew E. Lelling, Assistant United States Attorney, with whom Carmen M. Ortiz, United States Attorney, was on brief, for appellee.

          Before Lynch, Thompson, and Kayatta, Circuit Judges.


         Convicted of committing securities fraud and conspiring to commit securities fraud under 15 U.S.C. §§ 78j(b), 78ff(a), and 18 U.S.C. § 371, Eric McPhail was neither a corporate insider nor a trader of securities. Rather, he received material, nonpublic information from a corporate insider, and then passed that information along to friends who used the information to obtain substantial trading gains. Recently, we affirmed the conviction of one of those trading friends. See United States v. Parigian, No. 15-1994, 2016 WL 3027702 (1st Cir. May 26, 2016). We now consider McPhail's own conviction following a trial by jury. For the reasons that follow, we reject McPhail's arguments on appeal and affirm his two-count conviction.

         I. Background

         We summarize the evidence in a light favorable to the jury's verdict, see United States v. Prieto, 812 F.3d 6, 9 (1st Cir. 2016), reserving the detailed treatment of some points for later in this opinion.

         The probative bulk of the government's evidence at trial consisted of emails sent to and from McPhail and testimony by Angelo Santamaria, an unindicted individual who served from 2004 to 2011 as an executive at American Superconductor Corporation ("AMSC"), a publicly-traded corporation. McPhail, a tile salesman by vocation, first met Santamaria in late 2007 at the Oakley Country Club in Watertown, Massachusetts. The two men became frequent golf partners and, over the course of about a year, close friends. Together, they traveled to Florida and Las Vegas on vacation, attended sporting events such as the Kentucky Derby, and gambled at casinos. They communicated daily and saw one another several times a week. In May 2009, Santamaria loaned McPhail $6, 000 to pay off a gambling debt that McPhail was trying to hide from his wife. Santamaria later forgave the debt entirely. When McPhail's divorce jeopardized his spousal membership at the golf club, Santamaria served as McPhail's lead sponsor and successfully lobbied club members to permit McPhail to join as a member in his own right. In 2010, Santamaria's wife asked McPhail to mediate a marital argument that threatened Santamaria's marriage.

         A frequent topic of conversation between the two friends was Santamaria's preoccupation with the performance of his retirement investments, which consisted largely of AMSC stock. In the course of airing these concerns to McPhail, Santamaria occasionally discussed nonpublic aspects of AMSC's business activities and their potential impact on the company's stock performance. McPhail, for example, learned several days in advance that AMSC was about to lose its biggest customer. And on another occasion, McPhail had a heads-up that AMSC was on the cusp of signing an important deal that would surely influence the company's stock market valuation.

         There is no claim that McPhail himself traded on the information he received from Santamaria. Rather, beginning in July 2009, unbeknownst to Santamaria, McPhail began passing along the upshot of the information he received in these conversations to a set of friends, most of whom were members of a regular golfing group. At trial, the government demonstrated that the lion's share of this tipping occurred via email. For example, on July 23, 2009, McPhail emailed the group:

AMSC was up another buck today ...I spoke to someone;) who thinks that there is going to be an announcement on the 29th that will bump the stock significantly followed up with release of earnings on the 30th that will bump it again. Look for 20, 30, 40 percent the middle to end of next week (wednesday and thursday).

         All told, the members of the golf group and other friends of McPhail's made nearly $500, 000 by executing AMSC trades premised on the tips from McPhail. The government indicted McPhail, singling him out as the scheme's tipper, and a jury convicted him on both counts.

         II. Analysis

         The government's case against McPhail is predicated on the "misappropriation" theory of liability for insider trading first recognized by the Supreme Court in United States v. O'Hagan, 521 U.S. 642, 652 (1997). Under this theory, an outsider who owes no duty to a corporation or its shareholders commits the prohibited "deceit . . . in connection with the purchase or sale of any security, " 17 C.F.R. § 240.10b-5(c), by obtaining inside information in confidence and then failing to disclose to the source of the information the fact that the outsider is using the information in breach of a duty of confidence owed to the source, see O'Hagan, 526 U.S. at 652-53. In plain terms, when Sally tells Joe insider information about her corporation, to be held by Joe in confidence, and Joe then trades on that information without telling Sally, Joe is guilty of deception (of Sally) "in connection with the purchase or sale of any security." 17 C.F.R. § 240.10b-5; see Parigian, 2016 WL 3027702, at *3. Such a theory of liability can also apply when the misappropriator does not trade, but instead obtains a benefit by revealing the information to a third person who trades based on the misappropriated information. See, e.g., SEC v. Rocklage, 470 F.3d 1 (1st Cir. 2006).

         Within the construct of this misappropriation theory, McPhail trains his appellate argument on three issues: Was the evidence sufficient to show that he knowingly breached a duty of confidence owed to Santamaria? Did the district court's instructions shift the burden of proof or misstate the state of mind element of the securities fraud offense? Did he receive a benefit as a result of his disclosure? We address each issue in turn.

         A. Duty of Trust and Confidence

         In O'Hagan, the existence of a duty of confidence owed by the defendant was clear: O'Hagan was a lawyer who traded on nonpublic corporate information he possessed only because the information belonged to a client of his law firm. O'Hagan, 521 U.S. at 647-49. The Supreme Court nevertheless did not confine application of the misappropriation theory to circumstances where insider and misappropriator shared such a formal fiduciary relationship. Rather, it opened the door to circumstances in which an expectation of trust and a reliance on discretion arises outside of a traditional fiduciary setting. See id. at 670 (referring to "a fiduciary or other similar relation[ship] of trust and confidence" (quoting Chiarella v. United States, 445 U.S. 222, 228 (1980)); see also Parigian, 2016 WL 3027702 at *6; United States v. McGee, 763 F.3d 304, 314 (3d Cir. 2014), cert. denied, 135 S.Ct. 1402 (2015)(both discussing O'Hagan's "broad[ ] brush" approach).

         In an exercise of its statutory rule-making authority that goes unchallenged by McPhail, the Securities and Exchange Commission ("SEC") followed up on O'Hagan by promulgating a rule in an attempt to "clarify and enhance" the groundwork of misappropriation liability by providing a non-exhaustive list of possible definitions of instances when such a duty might arise. Selective Disclosure and Insider Trading, 64 Fed. Reg. 72, 590, 72, 590 (proposed Dec. 28, 1999) (codified as amended at 17 C.F.R. § 240.10b5-2). The rule states that:

[A] "duty of trust or confidence" exists in the following circumstances, among ...

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