The SEC, Insider Trading, Golf And E-Mails
Insider trading is generally a profit making venture. But not always as a group of golf friends recently learned – and documented in numerous e-mails that may have actually created a better evidentiary trail than the much discussed Galleon wire-tap tapes. SEC v. McPhail, Civil Action No. 1:14-cv-12958 (D. Mass Filed July 11, 2014).
The case centers around the friendship between Eric McPhail his close friend, an Executive at American Superconductor Corporation, and a group composed largely of Mr. McFhail’s golf friends. That group was composed of The group of defendants Douglas Parigian, John Gilmartin, Douglas Clapp, James “Andy” Drohen, John Drohen and Jamie Meadows.
Mr. McPhail became close friends with the Executive through their country club. The two men frequently played golf together and socialized. Over time they became close and shared confidences with the understanding that the information would be kept confidential.
Mr. McPhail was also friends with the other defendants, several of who were amateur golfers and competed in tournaments. This group, which consisted of Messrs. Parigian, Gilmartin, Clapp and Andy Drohen, regularly exchanged e-mails, chatting about a variety of things which frequently focused on golf. John Drohen was often included in the e-mails.
Beginning in July 2009, and continuing for about the next two years, the e-mail chatter had a new subject: The performance of American Superconductor. Mr. McPhail began using the Executive to obtain inside information about his company. That information was then circulated among the golf e-mail group and used to trade, netting Mr. McPhail gifts from his friends. For example, prior to a July 30, 2009 earnings announcement by American Superconductor, Mr. McPhail told the e-mail group that they should purchase shares in the company. While Mr. McPhail stated he was “not allowed to say” why, he told the group in a July e-mail to “make sure you take note of the stock price before and after the 30th.”
In the days leading up to July 30, a number of other e-mails circulated among the group which was initially skeptical of the stock tips. Over time that changed. The group became convinced that Mr. McPhail’s information was genuine. Messrs. Parigian, Gilmartin, Clapp and Andy and John Drohen all purchased shares of AMSC as did Mr. McPhail before the July 30 earnings release.
On July 30, 2009 the company announced its revenues for the first quarter of fiscal 2009 had increased 83% over the quarter compared to the prior year. It was a record setting $73 million. The stock price closed up 22%. The golf e-mail group sold their shares with each member reaping a profit.
The process repeated in advance of the September 29, 2009 announcement by the company that it had signed a $100 million follow-on contract with Sinovel Wind Group Co., Ltd, a Chinese company engaged in the development and manufacturing of wind turbines. Initially, Mr. McPhail circulated an e-mail touting his round of golf that day with the Executive. He concluded by noting that he was going to a professional tournament with the Executive and “maybe I can get the next big stock tip.”
That tip came in late September at a baseball game attended by the Executive and Mr. McPhail . During the game the Executive confided to his friend that a $100 million deal with a China company was going to be signed shortly by American Semiconductor. The information was circulated in an e-mail to the group. It ended with the statement that “I like Pinot Noir and love steak . . . looking forward to getting paid back. Good luck . . . SHHHHHHHHHHHHHHH!!!!!!!!!!!!” The same day Messrs. McPhail, Parigian, Clapp and John Drohen purchased shares of the company. The deal was announced after the close of the market. The next trading day the share price increased 9% giving each man a profit.
The inside information did not always yield profits. For example, on February 2, 2010 American Semiconductor announced its earnings. Mr. McPhail learned about the results in advance while watching a football game at a local bar with the Executive. An e-mail circulated to the group noting that he had “Talked to a friend” and the earnings for American Semiconductor were “going to be good but not going to crush estimates . . .” Updates were provided as the announcement approached. Messrs. Parigian, Clapp and John Drohen each purchased stock and/or options in advance of the announcement. Despite the positive announcement the stock price declined.
This pattern repeated over the two year period with Mr. MPhail obtaining confidential, material, non-public information from his friend and then circulating it in e-mails to the group. Typically, various members of the group traded on the inside information obtained from the Executive, whose identity they essentially guessed over time, on five occasions. The largest profits came from trading in advance of an April 5, 2011 announcement by American Semiconductor that its fourth quarter and fiscal year-end financial results would be lower than expected due to a deteriorating relationship with its primary customer, Sinovel Wind Group. Following the announcement the company share price dropped 42%. Mr. Parigian had profits and avoided losses of $278,289 while Me Meadows had profits of $191,521. The complaint alleges violations of Exchange Act Section 10(b).
Messrs. Gilmartin, Clapp, Andy Drohen and John Drohen settled with the Commission, with each consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). In addition, each paid disgorgement, prejudgment interest and a civil penalty equal to their trading profits: Mr. Gilmartin $23,713 in disgorgement; Mr. Clapp, $11,848 in disgorgement; Andy Drohen $22,543 in disgorgement; and John Drohen $8,972 in disgorgement. See Lit. Rel. No. 23040 (July 11, 2014).