United States v. Parigian

• Decision Date: 26 May 2016
• Docket Number: No. 15–1994,15–1994
• Citation: 824 F.3d 5
• Parties: United States of America, Appellee, v. Douglas A. Parigian, Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

824 F.3d 5

United States of America, Appellee

v.Douglas A. Parigian, Defendant, Appellant.

No. 15–1994

United States Court of Appeals, First Circuit.

May 26, 2016

Allison J. Koury, Wayland, for appellant.

Andrew E. Lelling, Assistant United States Attorney, with whom Carmen M. Ortiz, United States Attorney, was on brief, for appellee.

Before Kayatta, Stahl, and Barron, Circuit Judges.

KAYATTA

, Circuit Judge.

Acting on obviously nonpublic information that a golfing buddy received from a corporate insider, Douglas Parigian made in excess of $200,000 trading in securities. The United States subsequently indicted Parigian for criminal securities fraud. As ultimately amended, the indictment pressed a so-called misappropriation theo knew or should have known that, by providing the inside information to Parigian, his buddy both breached a duty of trust and confidence and personally benefited by doing so. See generally United States v. O'Hagan , 521 U.S. 642, 651–53, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997)

; SEC v. Rocklage , 470 F.3d 1, 6–7 (1st Cir. 2006). After unsuccessfully moving to dismiss the indictment for failure to allege a crime, Parigian reached an agreement with the government whereby he pled guilty to the charges conditionally, under Federal Rule of Criminal Procedure 11(a)(2), so that this court could then rule on the questions raised by his challenge to the superseding indictment. We now do so, holding that Parigian's preserved challenges to the indictment fall short of the mark.

I. Background

As ultimately amended, the grand jury's indictment charged Parigian and his golfing buddy co-defendant Eric McPhail¹ with violating 15 U.S.C. §§ 78j(b)

, 78ff(a), and 18 U.S.C. § 2, by “knowingly and willfully ... employ[ing] manipulative and deceptive devices and contrivances in connection with the purchase and sale of securities in contravention of [Securities and Exchange Commission (“SEC”) ] Rule 10b–5.” See 17 C.F.R. § 240.10b–5(c). Another count charged them both with conspiracy to commit the same offense.²

See 18 U.S.C. § 371.

Ordinarily, because this appeal follows a guilty plea, we would derive the facts from the plea agreement, the change-of-plea colloquy, the unchallenged portions of the presentence investigation report, and the sentencing hearing transcript. See United States v. Ocasio–Cancel , 727 F.3d 85, 88 (1st Cir. 2013)

. But because Parigian's appeal trains solely on the legal adequacy of the challenged superseding indictment, we focus our review within the indictment's four corners. See

United States v. Horton , 580 Fed.Appx. 380, 383 (6th Cir. 2014) (unpublished), cert. denied , ––– U.S. ––––, 135 S.Ct. 1006, 190 L.Ed.2d 879 (2015) (limiting appellate review “to the four corners of the indictment” when defendant entered conditional guilty plea preserving right to appeal denial of motion to dismiss based on indictment's failure to state a crime).

In addition to its recitation of the offenses as described and the laws allegedly violated by the defendants, the eighteen-page indictment contained numerous factual allegations describing each person's role in the insider trading scheme. The scheme's insider (“Insider”) was an un-indicted individual who served from 2004 to 2011 as an executive at American Superconductor Corporation (“AMSC”), a publicly-traded Massachusetts-based corporation in the business of producing components used in the wind power industry. McPhail and Insider were friends. The indictment claimed that, by 2009, the relationship between McPhail and Insider was one of “trust and confidence, including a history, pattern, and practice of sharing professional and personal confidences.” They also shared “an understanding that information conveyed between them was to remain confidential.” The indictment expressly alleged that Parigian “was aware of” that relationship and “knew” that Insider was an executive at AMSC.

Beginning no later than July of 2009, Insider began revealing to McPhail highly material inside information about AMSC that allowed McPhail to predict the upshot of impending, yet-to-be-announced earnings reports and major commercial transactions. Notwithstanding his alleged understanding with Insider that he was to treat the information confidentially, McPhail began to disseminate the information about developments at AMSC, mostly via email, to a circle of regular golfing companions, including Parigian. During the next two years, the tips allowed Parigian to time his purchases and sales of AMSC securities (and options) so as to avoid losses and secure gains in the wake of certain public announcements of the information previously passed to him by McPhail.

The email traffic accompanying this prescient trading indicated that secrecy was the order of the day. One of McPhail's early tips concluded with “SHHHHHHHHHHHHH!!!!!!!!!!!!!!!!!” The group discussed whether the information would remain “safe” while they tipped off another person. McPhail stressed the need to use a dedicated email thread, while Parigian claimed that he was deleting his emails.

There is no allegation that McPhail himself engaged in trading. Rather, the indictment posits that he solicited “getting paid back” by Parigian and the others with wine, steak, and visits to a massage parlor. Parigian assured him that “I will take you for a nice dinner at Grill 23.” Another tipped trader offered McPhail a free golf outing.

Parigian moved to dismiss the superseding indictment, arguing that it failed to adequately allege several elements of the crime of securities fraud committed by trading on misappropriated inside information. After this motion was denied by the district court, see United States v. McPhail , No. 14–cr–10201–DJC, 2015 WL 2226249, at *5 (D. Mass. May 12, 2015)

, Parigian entered into a plea agreement that preserved his right to appeal the denial of the motion. He was sentenced to time served and three years of supervised release, with eight months of home confinement.

II. Standard of Review

In reviewing a district court's denial of a motion to dismiss an indictment, we review legal questions de novo, any relevant factual findings for clear error, and the court's “ultimate ruling” for abuse of discretion. United States v. Doe , 741 F.3d 217, 226 (1st Cir. 2013)

(quoting United States v. Lopez–Matias , 522 F.3d 150, 153 (1st Cir. 2008) ).

An indictment is sufficient “if it contains the elements of the offense charged, fairly informs the defendant of the charges against which he must defend, and enables him to enter a plea without fear of double jeopardy.” United States v. Yefsky , 994 F.2d 885, 893 (1st Cir. 1993)

(citing Hamling v. United States , 418 U.S. 87, 117, 94 S.Ct. 2887, 41 L.Ed.2d 590 (1974) ). A well-pleaded indictment can parrot “the statutory language to describe the offense, but it must also be accompanied by such a statement of facts and circumstances as to inform the accused of the specific offense with which he is charged.” United States v. Savarese , 686 F.3d 1, 6 (1st Cir. 2012) ; see also Fed. R. Crim. P. 7(c)(1) (the “indictment ... must be a plain, concise, and definite written statement of the essential facts constituting the offense charged”).

III. Analysis

The government's case against Parigian relies on the “misappropriation” theory of liability for insider trading as recognized in O'Hagan

. In O'Hagan, corporate insiders communicated material, nonpublic information to the corporation's law firm in connection with a proposed tender offer. O'Hagan , 521 U.S. at 647–49, 117 S.Ct. 2199. O'Hagan, who practiced law at that firm, used the information to trade in the stock of the take-over target. Id. The court held that O'Hagan's conduct constituted fraud in connection with the purchase or sale of securities because, by breaching his fiduciary duties owed to his firm and to his firm's client, he appropriated confidential information of his law firm's client in a manner that deceived “those who entrusted him with access to confidential information.” Id. at 652, 117 S.Ct. 2199. In short, a misappropriator who knowingly violates a “duty of loyalty and confidentiality,” id. and trades to his advantage, “gains his advantageous market position through deception,” id. at 656, 117 S.Ct. 2199. “[I]t is that deception which brings this trading within the statutory language.” Rocklage , 470 F.3d at 6.

The indictment seeks to portray McPhail, in the first instance, as the misappropriator, alleging that he owed Insider a duty of trust and confidence that McPhail breached by tipping Parigian. It then seeks to hold Parigian liable as a tippee who traded with sufficient awareness of that breach. This derivative application to a tippee one step removed from the initial violation parallels what often occurs in classical insider trading cases, where liability attaches not just to the insider or to the insider's tippee, but also to a more remote tippee provided that the remote tippee has sufficient knowledge of the facts that make the conduct unlawful. See, e.g. , United States v. Falcone , 257 F.3d 226, 235 (2d Cir. 2001)

(affirming conviction of remote tippee who knew “the details of the scheme”). Parigian does not dispute that the misappropriation theory of criminal securities fraud can apply in this manner to a remote tippee. As in Rocklage, we therefore assume that it can so apply. See

Rocklage , 470 F.3d at 14.

Parigian argues, instead, that the indictment fails to allege criminal securities fraud because: (1) It does not employ the proper measure of mens rea, (2) It does not adequately allege awareness by Parigian that McPhail's disclosures breached a duty of trust and confidentiality owed to Insider, (3) It does not adequately allege that McPhail received a personal benefit from tipping off Parigian, and, (4) It fails to allege that Insider received a personal benefit. We address each argument in turn.

A. Mens Rea

As we will describe, at various points the indictment alleges that Parigian “knew or should have...