United States v. Parigian
2016 U.S. App. LEXIS 9671
| 1st Cir. | 2016Background
- Douglas Parigian (remote tippee) traded on material, nonpublic AMSC information he received from golfing partner Eric McPhail, realizing over $200,000; McPhail received tips from an AMSC executive (Insider).
- Grand jury superseding indictment charged Parigian and McPhail under Rule 10b-5 (15 U.S.C. § 78j(b), 78ff(a)) and conspiracy; indictment alleged a longstanding confidential relationship between McPhail and Insider and that McPhail disseminated confidential tips to a golfing group.
- Indictment described emails urging secrecy, requests for reimbursement to McPhail (wine, dinners, golf, massage parlor) as expected personal benefit, and Parigian deleting emails and promising to take McPhail to dinner.
- Parigian moved to dismiss the superseding indictment for failure to state a crime; district court denied the motion; Parigian entered a conditional guilty plea preserving his right to appeal the denial.
- On appeal, Parigian argued the indictment failed to allege (1) proper mens rea, (2) his awareness that McPhail breached a duty of trust/confidence, (3) that McPhail received a personal benefit, and (4) that Insider expected a benefit.
- The First Circuit reviewed the indictment "within its four corners," found key challenges forfeited/waived where not preserved, and affirmed denial of the motion to dismiss.
Issues
| Issue | Plaintiff's Argument (Parigian) | Defendant's Argument (Gov't) | Held |
|---|---|---|---|
| Mens rea standard | Indictment impermissibly uses "knew or should have known" rather than proof of actual knowledge/willfulness required for criminal liability | Parigian waived/challenged too late; indictment also alleges "knowingly and willfully" elsewhere | Waived/forfeited; court declines to strike indictment on that basis |
| Awareness of tipper's breach (duty of trust/confidence) | Indictment fails to allege Parigian knew or should have known McPhail breached a duty owed to Insider | Indictment alleges history/pattern/practice of confidential sharing, Parigian knew Insider was AMSC executive, secrecy efforts support awareness | Allegations sufficient to fairly inform defendant; survive motion to dismiss |
| Personal benefit to tipper (McPhail) | No adequate allegation of a benefit to McPhail from tipping | Indictment alleges friendship plus anticipated tangible benefits (dinners, golf, massage, wine) | Under controlling First Circuit precedent, alleged expectation of benefits is sufficient to plead a personal benefit |
| Personal benefit to Insider | Government must allege Insider expected a benefit when passing info to McPhail | Misappropriation theory does not require Insider to expect a benefit; duty arises because information was entrusted | Court rejects requirement that Insider expected a benefit; no such element in misappropriation theory |
Key Cases Cited
- United States v. O'Hagan, 521 U.S. 642 (describes misappropriation theory: breach of duty of loyalty/confidentiality can make trading fraudulent)
- Dirks v. SEC, 463 U.S. 646 (tippee liability requires insider to benefit from disclosure under classical theory)
- SEC v. Rocklage, 470 F.3d 1 (1st Cir. rule that gift to friend can satisfy tipper benefit requirement)
- United States v. Newman, 773 F.3d 438 (2d Cir. requiring meaningful personal benefit for tipper; discussed distinction in circuits)
- SEC v. Obus, 693 F.3d 276 (2d Cir. discussion of "knew or should have known" in civil context)
- United States v. Falcone, 257 F.3d 226 (affirming conviction of remote tippee with knowledge of scheme details)
- United States v. Sargent, 229 F.3d 68 (1st Cir. civil case finding social/business friendship can support inference of tipper benefit)
- United States v. McGee, 763 F.3d 304 (discusses O'Hagan's broad treatment of relationships giving rise to duties)
- United States v. Salman, 792 F.3d 1087 (9th Cir. finding intent to benefit friend suffices for breach; certiorari noted)