1. Why was this case considered a misappropriation theory case rather than a traditional insider-trading case?

2. If McGee had disclosed his trading to Maguire, would that have relieved him from liability? Why or why not?

3. Was McGee’s conduct what Congress intended to prohibit or has rule 10b-5 been applied too broadly? Isn’t the underpinning of the Act’s Section 10b to prevent insiders from using confidential information to profit? Why should that apply to outsiders such as McGee? If McGee had overheard the information while Maguire told someone else, would that change your analysis? Was McGee’s conduct ethical? Why or why not?

Timothy McGee, a financial advisor with more than 20 years of experience, first met Christopher Maguire while attending Alcoholics Anonymous (AA) meetings. As a newcomer to AA, Maguire sought support from McGee, who shared similar interests and had successfully achieved sobriety for many years. For the better part of a decade, McGee informally mentored Maguire in AA. They shared intimate details about their lives to alleviate stress and prevent relapses. Given the sensitive nature of their communications, McGee assured Maguire that their conversations would remain private. Like-wise, Maguire never repeated information that McGee entrusted to him. This comported to the general practice in AA, where a “newcomer can turn . . . with the assurance that no newfound friends will violate confidences relating to his or her drinking problem.”

During this same time, Maguire was a member of executive management at Philadelphia Consolidated Holding Corporation (“PHLY”), a publicly traded company. In early 2008, Maguire was closely involved in negotiations to sell PHLY and experienced sporadic alcohol relapses. During a conversation in which McGee was trying to convince Maguire to return to AA, Maguire blurted out the inside information about PHLY’s imminent sale, telling McGee that he was under extraordinary pressure and that “we’re selling the company . . . for three times book [value].” McGee agreed that he would keep the information that Maguire had told him confidential as he had in all previous conversations. 

After this conversation, McGee purchased a substantial amount of PHLY stock on borrowed funds without disclosing to Maguire his intent to use the inside information. Before the conversation, PHLY stock represented one-tenth of McGee’s stock portfolio. Less than a month later, it constituted 60 per-cent of his holdings. Before this information became public, McGee borrowed approximately $226,000 to help finance the purchase of PHLY shares. Shortly after the public announcement of PHLY’s sale, McGee sold his shares, resulting in a $292,128 profit. 

On November 15, 2012, a jury found McGee guilty of violating the insider-trading laws under rule 10b-5. McGee appealed, arguing that he could not be liable under the misappropriation theory absent a fiduciary relationship between a misappropriator (McGee) and his source (Maguire).

The U.S. Court of Appeals for the Third Circuit ruled against McGee and upheld his conviction for insider trading. The court rejected McGee’s defense that the misappropriation theory required a fiduciary duty between McGee and Maguire in order to trigger insider-trading liability. The court held that the U.S. Supreme Court’s precedent cases did not define the relationship so narrowly. Rather, any duty of loyalty, confidentiality, trust, or confidence would suffice for “recognized duties” to establish misappropriation liability. 

“Contrary to McGee’s contention, Supreme Court precedent does not unequivocally require a fiduciary duty for all § 10(b) nondisclosure  liability . . . [T]he Court stressed that misappropria-tion liability extends to those who breach a recog-nized duty.  .  .  .  The Court painted with a broader brush, referring to the requisite relationship as a fiduciary or other similar relationship, an ‘agency or other fiduciary relationship,’ a ‘duty of loyalty and confidentiality,’ and a ‘duty of trust and confidence.’ We will not assign a meaning to ‘recognized dut[ies]’ that the Court did not acknowledge.

“The Supreme Court’s traditional insider trading precedent does not change this result. [Previous cases]  call for a ‘specific relationship between two parties.’ Although these cases often referred to fiduciaries, they spoke also in broader terms. [For example], for traditional insider trading, there is no duty to disclose if the trader is not an agent, a fiduciary, or ‘a person in whom the sellers [of the securities] had placed their trust and confidence’ . . .”