Securities Law

3rd Circuit upholds insider-trading conviction based on information gleaned through AA friendship

A federal appeals court has upheld an insider trading conviction based on information gleaned from a member of Alcoholics Anonymous.

The Philadelphia-based 3rd U.S. Circuit Court of Appeals upheld the securities fraud conviction of Timothy McGee in an Aug.14 opinion, report the Legal Intelligencer and ABA Media Alerts.

McGee, a financial adviser, was convicted based on allegations he traded on information from a fellow AA member who revealed that stress caused by the impending sale of his company had caused him to relapse. McGee had served as a mentor to the member and assured him their conversations were private, according to the opinion. McGee made a profit of nearly $300,000 on shares he bought in the company before the public announcement of its sale.

McGee was charged under the misappropriation theory of insider trading, which bars trading by outsiders who misappropriate confidential information in breach of a duty to disclose owed to the source of the information, rather than a duty owed to shareholders.

McGee had claimed his conviction was based on a Securities and Exchange Commission rule that was invalid because it allows liability absent a fiduciary relationship between the person who used the inside information and its source. The 3rd Circuit disagreed, saying the SEC had acted under a broad grant of authority under Section 10(b) of the Securities and Exchange Act.

“Although we are not without reservations concerning the breadth of misappropriation” under the rule, the court said, “it is for Congress to limit its delegation of authority to the SEC or to limit misappropriation by statute.”

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