When does friendship become a source of securities fraud liability? According to a recent decision in the Eastern District of Pennsylvania, it happens when two friends who met through Alcoholics Anonymous (AA) talk about work and one of them trades on information learned in those conversations.
On Sept. 12, 2012, in SEC v. McGee,1 Judge Timothy J. Savage of the Eastern District of Pennsylvania denied defendant Timothy McGee’s motion to dismiss the SEC’s complaint asserting insider-trading claims against him stemming from trades he allegedly made based on information about a potential acquisition he learned about from his friend and fellow AA memberwho was an executive (the Insider) at the company being acquired. Invoking the misappropriation theory of insider trading,2 the SEC alleged that McGee and the Insider’s friendship and their membership in AA gave rise to a “duty of trust and confidence” such that McGee could not trade on the information about the potential acquisition that the Insider had shared.3 Denying McGee’s motion to dismiss, the court held that the SEC at the pleading stage had met its burden because the complaint adequately alleged that McGee and the Insider “had a history of sharing and maintaining confidences.”4
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