FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MASSACHUSETTS [Hon. Denise J. Casper, U.S. District Judge]
William J. Cintolo, with whom Thomas R. Kiley, and Cosgrove
Eisenberg & Kiley, PC, were on brief, for appellant.
E. Lelling, Assistant United States Attorney, with whom
Carmen M. Ortiz, United States Attorney, was on brief, for
Lynch, Thompson, and Kayatta, Circuit Judges.
KAYATTA, CIRCUIT JUDGE.
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.
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.
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
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
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).
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.
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).
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.
Duty of Trust and Confidence
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[ ]
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
[A] "duty of trust or confidence" exists in the
following circumstances, among ...