United States v. McGee

• Citation: 763 F.3d 304
• Decision Date: 14 August 2014
• Docket Number: No. 13–3183.,13–3183.
• Parties: UNITED STATES of America v. Timothy McGEE, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

763 F.3d 304

UNITED STATES of America

v.Timothy McGEE, Appellant.

No. 13–3183.

United States Court of Appeals, Third Circuit.

Argued Feb. 12, 2014.

Filed: Aug. 14, 2014.

John C. Grugan, Esq., (Argued), Christine R. O'Neil, Esq., Ballard Spahr, Philadelphia, PA, Counsel for Appellant.

Jay M. Feinschil, Esq., Philadelphia, PA, Counsel for Amicus Appellant.

Zane D. Memeger, Esq., Frank R. Costello, Jr., Esq., Bernadette A. McKeon, Esq., (Argued), Office of United States Attorney, Philadelphia, PA, Counsel for Appellee.

Before: CHAGARES, SHWARTZ and ALDISERT, Circuit Judges.

OPINION OF THE COURT

ALDISERT, Circuit Judge.

Timothy McGee appeals his convictions for (1) securities fraud under the misappropriation theory of insider trading pursuant to 15 U.S.C. §§ 78j (b) and 78ff, and Securities and Exchange Commission (“SEC”) Rules 10b–5 and 10b5–2(b)(2), and (2) perjury pursuant to 18 U.S.C. § 1621. McGee raises several issues on appeal. He first challenges his securities fraud conviction, arguing that Rule 10b5–2(b)(2) is invalid because it allows for misappropriation liability absent a fiduciary relationship between a misappropriator of inside information and its source. McGee contends also that there is insufficient evidence to sustain his convictions, and that the District Court exceeded its discretion in denying his motion for a new trial based on newly discovered evidence. For the reasons that follow, we will affirm.¹

I.

Between June and July 2008, McGee obtained material nonpublic information about the impending sale of Philadelphia Consolidated Holding Corporation (“PHLY”), a publicly traded company, from Christopher Maguire, a PHLY insider. Before this information became public, McGee borrowed approximately $226,000 at 6.875% interest to partially finance the purchase of 10,750 PHLY shares. Shortly after the public announcement of PHLY's sale, McGee sold his shares, resulting in a $292,128 profit.

A financial advisor with more than twenty years of experience, McGee first met Maguire between 1999 and 2001 while attending Alcoholics Anonymous (“AA”) meetings. AA is a fellowship of recovering alcoholics who share a desire to stop drinking. AA members are encouraged to seek support from other members in their efforts to stay sober. 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. Though the two biked and competed in triathlons together, sobriety was “the primary purpose” of their relationship. J.A. 109–110. To achieve this purpose, 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 were going to remain private. Likewise, 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.” Amicus Curiae Br. Supporting Appellant at 12 (quoting Alcoholics Anonymous World Servs., Inc., 44 Questions 11 (2008)). McGee encouraged Maguire to use his services as an investment adviser, telling Maguire, “I know everything about what you're going through from an alcohol perspective. You can keep your trust in me.” J.A. 112. Maguire repeatedly declined McGee's offers.

In early 2008, Maguire was closely involved in negotiations to sell PHLY. During this time, Maguire experienced sporadic alcohol relapses, culminating in a drinking episode a week or two after June 21–22, 2008 at a weekend golf event. Shortly after the golf event, Maguire recommenced his regular AA attendance. McGee saw Maguire after a meeting and inquired about his frequent absences. In response, Maguire “blurted out” the inside information about PHLY's imminent sale. J.A. 133. He told McGee, “Listen, we're selling the company.... for three times book [value]. We are selling it for 61.50. [T]here's a lot of pressure. There's just a lot of things going on, and I'm not dealing with it well.” J.A. 133. He testified that he expected McGee to keep this information confidential. At the time, the sale had not been publicly announced and Maguire “had not said a word to anybody.” J.A. 135. He believed he could trust McGee with the information given their long history of sharing confidences related to sobriety.

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:

On June 30, 2008, PHLY stock represented one-tenth of McGee's stock portfolio. Less than a month later, it constituted 60% of his holdings. In the interim period, McGee made the following purchases: July 15, 2008, 1,000 shares at $33 per share; July 17, 2008, 8,250 shares at $33 per share; July 18, 2008, 1,000 shares at $34 per share; and July 22, 2008, 500 shares at $35 per share. On July 23, 2008, after the announcement of the sale, the stock price rose to $58 per share.... To finance his purchase of the 8,250 shares on July 17, 2008, he borrowed approximately $226,000, at 6.875% interest.

United States v. McGee, 955 F.Supp.2d 466, 472 (E.D.Pa.2013) (footnotes omitted).

Shortly after the sale was publicly announced, the SEC commenced an investigation into McGee's unusually high volume of trades in PHLY stock. On September 16, 2009, McGee gave sworn testimony before the SEC stating that he “knew nothing” about the impending sale of PHLY before he purchased the stock in July 2008. J.A. 53–54, 1630–1633. On May 10, 2012, a grand jury returned a two-count indictment charging McGee with (1) securities fraud under the misappropriation theory of insider trading in violation of § 10(b) of the Securities Exchange Act of 1934, SEC Rules 10b–5 and 10b5–2(b)(1)–(2), and (2) perjury in violation of 18 U.S.C. § 1621. McGee moved to dismiss the indictment contending that Rule 10b5–2(b)(1)–(2) is invalid. He argued that the rule conflicts with Supreme Court precedent because it allows for misappropriation liability absent a fiduciary relationship between a misappropriator and his source. The District Court denied his motion, holding that Supreme Court precedent does not conflict with or unambiguously foreclose Rule 10b5–2(b)(1)–(2).

On November 15, 2012, a jury found McGee guilty of both counts. As to the securities fraud count, the jury found that his trades violated a relationship of trust or confidence with Maguire based on their “history, pattern, or practice of sharing confidences” pursuant to Rule 10b5–2(b)(2).²17 C.F.R. § 240.10b5–2(b)(2). McGee moved for a judgment of acquittal or a new trial, challenging the sufficiency of the evidence as to both convictions. He filed also a supplemental motion for a new trial based on newly discovered evidence. The District Court denied both motions. McGee timely appeals.

McGee renews his arguments on appeal, first contending that Rule 10b5–2(b)(2) exceeds the SEC's rulemaking authority under § 10(b). Second, he argues that there is insufficient evidence to support his convictions for securities fraud and perjury. Finally, he argues that the District Court exceeded its discretion in denying his motion for a new trial based on newly discovered evidence. We will address each argument in turn. Because we determine none to be persuasive, we will affirm.

II.

A.

To determine whether Rule 10b5–2(b)(2) exceeds the SEC's rulemaking authority, we begin with the language of the enabling statute. Section 10(b) of the Exchange Act of 1934 provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—

...

(b) [t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j (emphasis added). The SEC acted on this broad delegation of rulemaking authority by promulgating Rule 10b–5, which makes it unlawful for any person, in connection with the purchase or sale of any security, to “employ any device, scheme, or artifice to defraud,” or to “engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.” 17 C.F.R. § 240.10b–5. The Supreme Court has recognized two complementary theories of insider trading liability under § 10(b) and Rule 10b–5: the “traditional” and “misappropriation” theories.

Traditional insider trading occurs “when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information.” United States v. O'Hagan, 521 U.S. 642, 651–652, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997). Such trading constitutes a deceptive device under § 10(b) because the insider violates a “relationship of trust and confidence” with his shareholders by trading on nonpublic information learned as a company insider. Chiarella v. United States, 445 U.S. 222, 228, 100 S.Ct. 1108, 63 L.Ed.2d 348 (1980). The insider's position imposes a duty to either abstain from trading or disclose the inside information to the investors with whom he trades. Id.

In contrast, misappropriation focuses on deceptive trading by outsiders who owe no duty to shareholders. It occurs when a person “misappropriates confidential information for securities trading purposes, in breach of a duty [to disclose] owed to the source of the information.” O'Hagan, 521 U.S. at 652, 117 S.Ct. 2199 (emphasis added). If the trader discloses to the source his intent to trade, there is no deception and no § 10(b) liability. Id. at 655, 117 S.Ct. 2199. The Court first...