LEGAL ENVIRONMENT

PLEASE ANSWER ALL QUESTION INCLUDING TRUE AND FALSE

Case 16.2: U.S. v. McGee, 763 F.3d 304 (3rd Cir. 2014) (p. 546)

Facts: 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. They became good friends and shared personal conversations with one another on an agreement that the conversations would remain private. Maguire, an executive officer at Philadelphia Consolidated Holding Corporation (PHLY), a publicly-traded company, was closely involved in negotiations to sell PHLY. McGuire experienced sporadic alcohol relapses, and McGee attempted to convince Maguire to return to AA. During one of those sessions, Maguire blurted out the inside information about PHLYs imminent sale and told McGee it was being sold for three times book value. McGee agreed to keep the information confidential but purchased a substantial amount of PHLY stock on borrowed funds. After the public announcement of the sale, McGee sold the PHLY shares and made a profit of $292,128. McGee was convicted for violating insider trading laws. He appeals his conviction on the grounds the misappropriation theory requires a fiduciary relationship between the source (Maguire) and the appropriator (McGee). Issue: Must McGee owe the requisite fiduciary duty to Maguire in order to be convicted of violating insider-trading laws? Ruling: No. The U.S. Court of Appeals for the Third Circuit ruled against McGee and upheld his conviction for insider trading. The court rejected McGees defense that the misappropriation theory required a fiduciary duty between McGee and Maguire in order to trigger insider-trading liability. Rather, any recognized duties (such as loyalty, confidentiality, trust or confidence) would suffice.

Answers to case questions: 1. Why was this case considered a misappropriation theory case rather than a traditional insider transaction case? 2. If McGee had disclosed his trading to McGuire, would that have relieved him from liability?

TRUE AND FALSE QUESTIONS

1. Maguire is likely an insider for the purposes of insider short-swing transactions prohibited by Section 16.

2. Because PHLY is publicly traded, it is subject to the periodic disclosure requirements imposed by the 1934 Securities and Exchange Act.

3. Maguire did not breach his fiduciary duties to PHLY in disclosing the information to McGee, because he expected it to remain confidential pursuant to the rules of AA and McGee promised to keep the information confidential.

4. McGee cannot be found guilty of misappropriation of insider information unless he owes some form of duty of confidentiality to Maguire.

5. McGees misappropriation trade-in PHLY stock likely violated Pennsylvanias blue sky law.