by T. GormanPosted on Posted in SECActions

“Two out of Three Ain’t Bad is the title of one of rock band Meatloaf’s most famous songs. For most of us two out of three is probably a pretty good result. In major league baseball, in contrast, one out of three for a batter can be very good – a .333 batting average is far better than most. But what is the standard for insider trading? If the trader buys stock while in possession of inside information about a deal which later collapses but then profits from unforeseen events that have no relation to the inside information is that insider trading? If that happens two out of three times such that the trader fails the Meatloaf standard but not the major league baseball one should he be charged on one, two or three deals? According to the SEC and the Manhattan U.S. Attorney’s Office all three deals. SEC v. Maciocio, Civil Action No. 1:16-cv-04139 (S.D.N.Y. Filed June 3, 2016).

Messrs. Maciocio and Hobson were child hood friends. From 1998 through 2014 Mr. Maciocio was employed by PharmaCo. While he held various roles at the firm, eventually he became the Director of Chemical research and Development. In that role he was often consulted when the firm considered an acquisition and requested to assess if the company could manufacture the products of the potential target. David Hobson was a registered representative at various brokerage firms. One of his clients was long-time friend Michael Maciocio. When he moved firms Mr. Maciocio followed, even if the commission structure was higher.

The action centers on three transactions. The first began in January 2008. PharmaCO was interested in a potential deal with Mediavtion Inc. By March a confidentiality agreement had been signed and in April a term sheet followed.

Mr. Maciocio learned about the possible deal toward the end of May 2008. While the project was code named, Mr. Maciocio was given information about an Alzheimer’s drug manufactured by the other firm. That permitted him to identify the target and tip his long time friend in late May 2008. Both men began purchasing shares of Medivation.

In late July 2008 Mr. Maciocio learned that the two firms were in final negotiations. On August 7 he was given access to the electronic data room that contained the due diligence materials. One week later Mr. Maciocio purchased additional shares through an online brokerage account. Mr. Hobson also continued purchasing shares for his own accounts through his firm as well as for those of certain clients.

The deal was announced before the opening of the market on September 3, 2008. Medivation’s stock opened up 29.9% compared to the prior day’s close. That day Mr. Maciocio liquidated his holdings at a profit of $122,343. Mr. Hobson began liquidating his holdings on the day of the announcement, completing the process several days later at a profit of $100,169.

The second transaction involved Ardea Biosciences, Inc. Beginning in April 2010 PharmaCo considered the acquisition of the firm. Steps were taken to move forward with the deal. Those included having Mr. Maciocio analyze certain drugs of the code named target beginning in early June 2010.

Again Mr. Maciocio was able to determine the identity of the target. He tipped his long time friend, according to the complaint. Over the next several months the two men purchased and sold shares of Ardea. Mr. Hobson also bought shares for client accounts.

In early September PharmaCo learned negative information about Ardea. The two friends liquidated their share holdings. In early 2011, however, positive information about Ardea came to light. Mr. Maciocio purchased Ardea shares. Yet by mid-March 2011 Mr. Maciocio learned that his firm was not proceeding with the acquisition. Messrs. Maciocio and Hobson liquidated their shares.

The next year PharmaCo reversed course – the potential deal with Adrea was moving forward. In March Mr. Maciocio was again consulted regarding the target’s drugs. Again the complaint claims he tipped his friend. Mr. Maciocio made his first of two visits to Yahoo! Finance about Adrea. He began purchasing shares. After cell phone calls, Mr. Hobson also began purchasing and selling shares of Adrea. He purchased options and shares and shares for client accounts.

On April 9, 2012 PharmaCo again reversed course, dropping the Adrea deal. The two long time friends had four short cell phone calls. The next day Mr. Hobson liquidated a portion of his holdings. Mr. Maciocio also sold shares. Ten days later, however, on April 20, 2012 Mr. Hobson purchased an thirty additional Ardea call options, increasing his holdings. Three days later, on April 23, Ardea announced its acquisition by AstraZeneca before the market open. The share price opened up 51.25% compared to the prior day’s close. Mr. Maciocio liquidated his remaining holdings of the firm, realizing profits of $42,212. Mr. Hobson also liquidated his holdings as well as those in four customer accounts, realizing profits of, respectively, $34,113 and $5,445.

The third transaction involved Furiex Pharmaceuticals, Inc. It began in February 2014. The next month Mr. Maciocio learned about the potential acquisition when he discussed the code named deal and the firm’s drugs with his superior. From the information about the drugs he was able to determine the identity of the target.

Mr. Maciocio tipped his long time friend. Following a number of cell phone calls on March 25, 2014 the two men began purchasing shares of Furiex. Mr. Maciocio also conducted research on the stock that afternoon and evening. As the deal progressed the buying continued. Each man also liquidated other holdings, funding additional Furiex purchases. Mr. Maciocio continued to research the stock.

On Friday afternoon, April 25, 2014 Mr. Maciocio learned that his employer would likely abandon its effort to acquire Furiex. The two friends spoke on the phone several times. The next morning Mr. Maciocio received an email informing him that the deal was off. Mr. Maciocio briefly spoke with his friend.

On Monday before the market open Furiex announced its acquisition by Forest labs. Before the market open Mr. Hobson began placing sell order. At market open the share price of Furiex was up 28.6% from its closing price the day before. Minutes after the market open Mr. Maciocio liquidated his holdings, realizing profits of $70,719. Mr. Hobson liquidated all of his shares and those held by his customers, realizing profits of, respectively, $30,865 and $40,323.

The complaint alleges that Mr. Maciocio tipped his friend “in exchange for personal benefits to Maciocio, including investment advice, and also as a gift to Mr. Hobson. . .” The Commission’s complaint alleges violations of Exchange Act Section 10(b).

The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal charges against Mr. Hobson. Mr. Maciocio previously pleaded guilty to one count of conspiracy and two counts of conspiracy fraud. The SEC’s action is pending.

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by T. GormanPosted on Posted in SECActions

Is “wine, steak, and visits to a massage parlor” a quid pro quo personal benefit which, if received in conjunction the dissemination of material, non-public information, is sufficient to establish a breach of duty for illegal tipping in violation of the federal securities laws? The first circuit court of appeals recently concluded that it is sufficient in that circuit, conceding that it may not be in others. U.S. v. Parigian, No. 15-1994 (1st Cir. Decided May 26, 2016).

Douglas Parigian was indicted for insider trading along with his golfing friend, Eric McPhail. The two men were alleged to have traded in advance of earnings announcements regarding American Superconductor Corporation. The information traced to unnamed Insider who was a friend of Mr. McPhail. By 2009, according to the charging papers, Mr. McPhail and Insider had a relationship of trust and confidence. The two men had an understanding that information they shared would remain confidential.

It did not. Mr. McPhail misappropriated it, disseminating the information virtually on receipt. Much of the information was circulated in emails. One expressly cautioned the recipients to keep quiet about the information. The indictment also alleged that Mr. Parigian was aware that his information source knew an executive at American Superconductor. Mr. McPhail did not trade. The indictment claims, however, that he solicited “getting paid back” through wine, steak and similar items.

After his motion to dismiss the indictment was denied, Mr. Parigian pleaded guilty. His plea agreement preserved the right to appeal the denial of the motion. Subsequently, he was sentenced to time served and three years of supervised release with eight months of home confinement.

The circuit court considered three issues, rejecting each. First, the court considered a question regarding the sufficiency of the allegations regarding mens rea. The indictment alleges at various points that Mr. Parigian “knew or should have known” certain facts. This presents a question regarding whether the “knew or should have known” standard is adequate in a criminal case and, if so, whether sufficient facts have been pleaded to support the claim.

In a civil case the government is only required to establish the “knew or should have known” standard the court held, citing Dirks v. SEC, 463 U.S. 646, 660 (1983). In a criminal case, however, that formulation conflicts with the presumption that the government must prove that the defendant knew the facts that made his conduct illegal. While there are at least two circuit courts that have used the civil standard in criminal cases, there was no challenge to its use in those actions. In criminal cases the “better view is that there is simply no reason why the mens rea requirement of scienter that routinely and presumptively applies in criminal cases would not apply in this criminal case where Congress has given no indication that it should not” the court noted. That is consistent with the requirement that the government prove the additional element of “willfulness” in a criminal securities case. The indictment here is inconsistent with this notion. Since the defendant failed to raise this question until it was referenced in a reply brief however, it was waived.

The second point the court considered is whether the indictment adequately alleged that the defendant knew or should have known that the tips were made in breach of a duty of trust and confidence. The misappropriation theory only requires a breach of a “duty of trust and confidence” owed by the tipper to the insider under U.S. v. O’Hagan, 521 U.S. 642 (1997). Following O’Hagan the SEC issued Rule 10b5-2 which specified that a duty of trust and confidence exists when a “person communicating the material nonpublic information and the person to whom it is communicated have a history, pattern, or practice of sharing confidences, such that the recipient of the information knows or reasonably should know that the . . .” person furnishing the information expected that it will remain confidential. While it is questionable whether the standard of this rule applies in a criminal case, that issue was waived. Under the standard the allegations here are sufficient.

The final question involves the personal benefit to the tipper. Dirks required that the government establish the tipper benefited directly or indirectly from his disclosure. Previously, the circuit held that evidence establishing that the “misappropriator and the tipper were business and social friends with reciprocal interests allowed a jury to find a benefit in the form of the misappropriator’s reconciliation with a friend and the maintenance of a useful networking contact.” See, e.g., SEC v. Rocklage, 470 F.3d 1 (1st Cir. 2006). Although this standard is drawn from civil actions it is applicable here. Since the indictment alleged that Messrs. Parigian and McPhail were “reasonably good friends” and that there was a benefit of “various tangible luxury items in return for the tips” it is adequate under the prior decisions of the circuit.

Finally, the court noted that the second circuit had adopted a “more discriminating definition of the benefit to the tipper . . .” in U.S. v. Newman, 773 F. 3d 438 (2nd Cir. 2014), cert. denied, 136 S.Ct. 242 (2015). The ninth circuit in U.S. v. Salman, 792 F. 3d 1087 (9th Cir. 2015) cert. granted in part, 136 S.Ct. 899 (2016) in contrast, adopted a standard closer to that being applied here. While the Supreme Court will ultimately resolve this question “we do not venture to say [how] because, as a three-judge panel, we are bound to follow this circuit’s currently controlling precedent.” The court thus concluded that the indictment was sufficient under prior circuit decisions.

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