United States v. McPhail
2016 U.S. App. LEXIS 13581
| 1st Cir. | 2016Background
- Eric McPhail, a non‑insider, received material nonpublic AMSC information from longtime friend and AMSC executive Angelo Santamaria and passed those tips to a golf‑group of friends who traded and realized nearly $500,000 in profits.
- McPhail did not trade himself; prosecution proceeded under the misappropriation theory of insider trading (O'Hagan).
- Evidence included frequent personal interactions, communications showing McPhail described the information as "inside info" and "not allowed to say," and Santamaria's testimony that he had twice told McPhail not to repeat certain information.
- McPhail was indicted and convicted by a jury on two counts: securities fraud (15 U.S.C. § 78j(b), § 78ff(a)) and conspiracy (18 U.S.C. § 371).
- On appeal McPhail challenged (1) sufficiency of evidence that he owed and knowingly breached a duty of trust/confidence; (2) the district court's mens rea instruction ("knew or reasonably should have known"); and (3) whether he received or expected a personal benefit from tipping.
Issues
| Issue | Plaintiff's Argument (Gov't) | Defendant's Argument (McPhail) | Held |
|---|---|---|---|
| Existence of duty of trust/confidence | Evidence of a history/pattern of sharing confidences supported a Rule 10b5‑2(b)(2) duty; Santamaria told McPhail not to repeat info and McPhail nonetheless passed it on. | No sufficient evidence of a duty; information was shared casually and no explicit, mutual confidentiality agreement existed. | Affirmed: jury reasonably found a duty from the parties' history and McPhail's conduct; Rule 10b5‑2(b)(2) applies. |
| Mens rea standard in jury charge | Instruction that defendant "knew or reasonably should have known" Santamaria expected confidentiality was proper or at least not plainly erroneous. | Instruction lowered the government's burden by allowing conviction on negligence/should‑have‑known rather than actual knowledge/willfulness. | No reversible error: objection not preserved for de novo review; plain‑error standard failed because any error was not "obvious." |
| Personal benefit to tipper | McPhail expected tangible or intangible benefits (meals, a $3,000 payment, social standing, reciprocal favors); such benefits suffice under First Circuit precedent. | No legally cognizable personal benefit; tips were gifts without expectation of benefit and alleged payments were not proved as kickbacks. | Affirmed: evidence of concrete and subtle benefits satisfied the Circuit's liberal standard for personal benefit. |
| Sufficiency of evidence overall | Cumulative evidence (emails, Santamaria's testimony, benefits) supports convictions under the misappropriation theory. | Taken together evidence was insufficient and instructions flawed. | Affirmed: viewing evidence in the light most favorable to the verdict, a rational jury could convict. |
Key Cases Cited
- United States v. O'Hagan, 521 U.S. 642 (superseding case recognizing misappropriation theory of insider trading)
- Chiarella v. United States, 445 U.S. 222 (discussing duty‑based limits on §10(b) liability)
- Dirks v. SEC, 463 U.S. 646 (personal benefit test for tipper liability in classical theory)
- SEC v. Rocklage, 470 F.3d 1 (1st Cir. 2006) (misappropriator liable when third‑party trading confers benefit)
- United States v. Prieto, 812 F.3d 6 (1st Cir. 2016) (standard of review for sufficiency of the evidence)
- United States v. McGee, 763 F.3d 304 (3d Cir. 2014) (Rule 10b5‑2(b)(2) may impose duty by implication)
- United States v. Newman, 773 F.3d 438 (2d Cir. 2014) (narrower view of tipper personal benefit; cited for circuit split)