McGee inquired about the details of the deal, including the likely price and whether it was likely to go through, which the Insider shared.20 The SEC alleged that the information shared about the acquisition was material and nonpublic.21
Shortly after learning this information, McGee began purchasing shares of the company's stock and passing the information on to friends and family.22 On a purchase of about $360,000, McGee realized about $292,000 in profits after the acquisition was announced.23 The government became aware of these trades and McGee was indicted by federal prosecutors in Philadelphia and the SEC filed its complaint.
Thus, based on allegations that two people were members of AA and discussed their personal and professional lives in the context of their attempts to stay sober, the court in McGee held that the SEC had sufficiently alleged the existence of a "duty of trust and confidence" between them, and that McGee's stock purchases based on information shared between them breached that duty. This was true in spite of the evidently personaland not business or securities-relatedinformation that had historically been shared between the two men.
To the extent McGee can be read to pave the way for "close friendship," "shared personal struggles," or participation in groups whose members share personal information to suffice to give rise to what historically has been a fiduciary-type duty, it is a significant development in insider trading law. Close friendship or a history of sharing personal information, even in the marriage context, has never been sufficient to give rise to a duty of confidence akin to that of a fiduciary duty. That such information was shared between individuals who were members of the same social group traditionally would not alter this analysis. One can think of many social organizations who pledge confidentiality to one another with respect to information shared in what amounts to group therapy sessionsNarcotics Anonymous, Overeaters Anonymous, Clutterers Anonymous, Gamblers Anonymous and countless other groups modeled after or influenced by the AA model. It would be a significant expansion of the law to suggest that mere participation in such groups potentially subjects an individual to a fiduciary-like duty that could give rise to liability under the securities laws.
The SEC's focus on AA's Twelfth Traditionwhich, in essence, provides that what is said during a meeting stays at the meetingdoes not seem to resolve the concern that individuals might not be on notice that information shared outside of the meeting among members of the group, as was the case with McGee and the Insider, is expected to be kept confidential in a fiduciary-like way (even if it were conceded that information shared at the meetings itself were subject to such an expectation).
Further, the SEC's position in McGee ignores the very purpose of the Twelfth Tradition and in so doing morphs an agreement to respect anonymity into something far broader. The purpose of the Twelfth Tradition is to ensure that individuals can attend AA meetings without fear that they will be publicly identified as alcoholics.24 Accordingly, a better, and perhaps less concerning argument, would have been that the information shared by the Insider in McGee related specifically to his alcoholism (e.g., the Insider was drinking again because of the stress of the potential acquisition) and thus was within the ambit of information that the Insider would have expected McGee to keep confidential to preserve the Insider's anonymity. But the SEC did not so narrowly construe the confidentiality duty it argued existed and instead argued that it was the nature of the friendship and assurances of secret-keeping that cloaked all communications between McGee and the Insider with a blanket of confidentiality.
The SEC's broad position in McGee should give practitioners pause. It will obviously be important going forward in cases similar to McGee to develop facts that establish that the nature of any close friendship or relationship between members of social groups who agree to respect each other's privacy is distinguishable from McGee. Questions practitioners ought to be able to answer include: What were the expectations of confidentiality among the group members, not just the two parties at issue? Did they expect all information shared between them, regardless of its relationship to their joint purpose in meeting or whether it was shared in the context of a group meeting, to be kept confidential? What was historically discussed between the two individuals whose relationship is at issue? What historically did they do with information they shared? Did they ever either implicitly or explicitly inform the other party that information they discussed had been shared with others? While such facts might not be enough to warrant dismissal in light of McGee, such facts may be critical to persuading the SEC or a jury that premising liability on a "what happens in Vegas, stays in Vegas"-type promise without more is insufficient.
Jennifer Kennedy Park is a partner, and Matthew M. Bunda and Aaron Krieger are associates, at Cleary Gottlieb Steen & Hamilton.
1. SEC v. McGee, No. 12-1296, 2012 WL 4025409 (E.D. Pa. Sept. 13, 2012).
2. The "misappropriation theory" under Rule 10b5-(2) predicates insider trading liability on, among other things, a trader receivingand then trading oninside information from a source with whom the trader shares a relationship that gives rise to a "duty of trust and confidence." The trader is guilty of "misappropriating" the inside information in breach of a duty owed to the source.
3. McGee, 2012 WL 4025409, at *9.
4. Id. The court noted, however, that "[w]hether such a relationship of trust and confidence existed and whether the information was disclosed within the confines of that relationship are questions of fact…for a jury to decide. Id.