United States: The First, First Circuit Court To Opine On A Newman Challenge

Last Updated: May 19 2015
Article by Michele L. Adelman

And the Insider Trading Charges Stick

On May 12, 2015, in United States v. Douglas Parigian, U.S. District Court Judge Denise Casper became the first judge in the First Circuit to opine on a challenge to insider trading charges premised upon the Second Circuit's controversial ruling in United States v. Newman, 773 F.3d 438 (2d Cir. 2014). And the decision denied Parigian's motion to dismiss and held that under the facts of that case, Newman did not warrant dismissal despite that (1) there was no allegation that the "insider-tipper" received any benefit in exchange for the transmittal of the inside information, and (2) the alleged personal benefit to the "tippee" who subsequently tipped several rounds of inside information to Parigian was a steak dinner that the tippee would purportedly receive in the future.

The Parigian Case

The facts of the Parigian case at first blush appear to be classic insider trading. There are a group of golfing buddies. One of them is Douglas Parigian and another one is Eric McPhail. There is an insider – "Person A" – a senior executive at American Superconductor Corporation ("AMSC"), a company that produced wire, hardware and software for the wind power industry. According to the Superseding Indictment, beginning in July 2009, Person A disclosed material, nonpublic information about AMSC to McPhail, McPhail passed the information to Parigian and other golfing buddies, and they all traded on the information and made money. As luck would have it for the government, there are a series of emails chronicling the information flow, such as the following:

  • On July 9, McPhail sent an email "Try this one ... AMSC ... watch it on July 30th." (Superseding Indictment ¶ 14). Between July 9 and July 24, Parigian bought 1200 shares of AMSC stock. (Id. ¶ 19). On July 30, AMSC announced positive earnings and its share price shot up. Between July 30 and 31, Parigian sold 1000 AMSC shares and made about $9,000. (Id.). On July 30, McPhail emailed: "Nice profitable day for the boys. So when should I report in on which restaurant and massage parlor I want to be treated to?" (Id. ¶ 20). 
  • On September 29, McPhail sent an email: "Well boys ... went to the Sox game with a friend of mine tonight. He seems to think that AMSC has a $100 Million deal with China that should be signed very shortly ...This announcement should spike them close to 10%. Furthermore, circle October 29th for the next big day ... it could/should be as good as the last one ... I like Pinot Noir and love steak ... looking forward to getting paid back." (Id. ¶ 21). Parigian replied "I will take you for a nice dinner at Grill 23." (Id. ¶ 22). On the morning of September 29, Parigian bought a total of 1100 AMSC shares. (Id. ¶ 23). After the markets closed that day, AMSC issued a press release announcing a $100 million contract with Sinovel Wind Group Co., Ltd., a Chinese company involved in wind turbines, and the next day AMSC's stock shot up. (Id. ¶ 24). On September 30, Parigian sold 800 AMSC shares at a profit. (Id. ¶ 25). 
  • On September 29, McPhail sent an email about an AMSC quarterly earnings report to be released on October 29: "Hopefully there are no terrorist attacks between now and the 29th ... could be another bomber of a day. Similar to the end of July." (Id. ¶ 26). Parigian replied "I will be taking most my gains and putting it ALL on Options before Oct. 29. I just wish I knew what an Option was." (Id. ¶ 27). On October 22, McPhail emailed "Certainly looks like today may be a good buying opportunity for AMSC, T minus one week." (Id. ¶ 30). Between September 29 and October 28, Parigian purchased approximately 1180 AMSC shares and 60 AMSC call options. (Id. ¶ 32). On October 29, McPhail emailed "Please keep your arms and feet inside ... enjoy the ride," and AMSC announced high revenues accompanied by a share price increase. (Id. ¶ 31). Between October 29 and 30, Parigian sold 1480 AMSC shares and 60 AMSC call options and netted about $5,952.36. (Id. ¶ 33).

The Newman Challenge

Parigian moved to dismiss the Superseding Indictment on the basis that the government failed to allege that the insider – Person A – breached a fiduciary duty to AMSC by receiving a personal benefit in exchange for providing the inside information to McPhail. Specifically, Parigian relied upon the following language in Newman: "The test for determining whether the corporate insider has breached his fiduciary duty 'is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty..." 773 F.3d at 446 (quoting Dirks v. SEC, 463 U.S. 646, 662 (1983)(emphasis added in original). Moreover, Parigian argued that he, as a tippee, must have knowledge of the foregoing quid pro quo, according to Newman. "For purposes of insider trading liability, the insider's disclosure of confidential information, standing alone, is not a breach. Thus, without establishing that the tippee knows of the personal benefit received by the insider in exchange for the disclosure, the Government cannot meet its burden of showing that the tippee knew of a breach." Id. at 448. The Superseding Indictment charging Parigian failed to allege any of these facts.

The District Court's Decision

The District Court declined to adopt the analysis espoused by Parigian. Rather, the Court found – consistent with the government's argument – that the Newman test did not apply because the case involved McPhail "misappropriating" the inside information from Person A and therefore the misappropriation theory – versus the classical theory – of insider trading applied. "[U]nder a misappropriation theory 'a fiduciary's undisclosed, self-serving use of a principal's information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information.'" United States v. Parigian, 2015 U.S. Dist LEXIS 62096 at *6 (quoting United States v. O'Hagan, 521 U.S. 642, 651-52 (1997)).

Thus, the Court found McPhail similar to the defendant in O'Hagan, a law firm attorney who was an "outsider" to a bidding company, who placed trades premised upon inside information about a proposed tender offer that was held by his law firm in confidence. Specifically, "the source of the material, nonpublic information (there, the law firm client; here, Person A) is an unknowing source and participant in the chain of information to the tipster (there, the law firm attorney; here, McPhail). Under this theory, a personal benefit need not be alleged to inure to the benefit of the unknowing participant, the source of the inside information." Id. at *9.

The Court also found that the relationship between Person A and McPhail was a "fiduciary-like" relationship, similar to the close relationship between two members of Alcohols Anonymous that was found sufficient for misappropriation liability in United States v. McGee, 763 F.3d 304, 316 (3d Cir. 2014). Id. at *9-10. "Given the nature of their close relationship and history, pattern and practice of sharing confidences, it is alleged that McPhail owed Person A a duty of trust and confidence and that he reasonably should have known that Person A's communications about AMSC should be kept in confidence." Id. at *10.

Finally, the Court found that "[t]o the extent that the Defendants are alternatively arguing that the indictment must allege that the tipster (McPhail) must receive a personal benefit and/or that the tippee (Parigian) knew that McPhail would receive, or expected to receive such benefit, the indictment here alleges both," citing to the allegations relating to the future steak dinner. Id. at *9.

The Conditional Guilty Plea

On May 12, 2015, Parigian entered a conditional plea of guilty to a Superseding Information charging him with conspiracy to engage in securities fraud and securities fraud pursuant to a plea agreement under Federal Rule of Criminal Procedure 11(a)(2). Specifically, Parigian pled guilty but preserved his right to appeal the denial of his Motion to Dismiss, and should he prevail on appeal, Parigian preserved the right to withdraw his guilty plea.

Issues on Appeal

While it is hard to predict where the First Circuit will go on this case and future insider trading cases post-Newman, there are some issues that are fair game under the facts of Parigian and the backdrop of Newman:

  • Whether the government must allege and prove a "personal benefit" to a tipper when alleging liability under the misappropriation theory of insider trading. Significantly, the Second Circuit came to the opposite conclusion in Newman and held that "the elements of tipping liability are the same, regardless of whether the tipper's duty arises under the 'classical' or the 'misappropriation' theory," 773 F.3d at 446, and at least one court in that circuit dismissed insider trading charges on that basis, see United States v. Conradt, 2015 U.S. Dist. LEXIS 16263 (S.D.N.Y. Jan. 22, 2015).
  • Whether the government's allegations with respect to the relationship between Person A and McPhail was sufficient to establish a fiduciary relationship sufficient to establish that McPhail "misappropriated" the AMSC inside information from Person A, similar to the O'Hagan law firm attorney misappropriating tender offer information from a client.
  • Whether the government's allegations with respect to McPhail anticipating receipt of a steak dinner at some point in the future after providing rounds of AMSC inside information to Parigian (and others) is sufficient to satisfy the personal benefit requirement. See, e.g., Newman, 773 F.3d at 450 (quoting Dirks v. SEC, 463 U.S. 646, 664 (1983))("[A] breach of the duty of confidentiality is not fraudulent unless the tipper acts for personal benefit, that is to say, there is no breach unless the tipper 'is in effect selling the information to its recipient for cash, reciprocal information, or other things of value for himself...'").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
15 Dec 2017, Seminar, Boston, United States

The New England Electricity Restructuring Roundtable has been meeting bimonthly since 1995 to discuss current topics related to important changes in the electric power industry in Massachusetts and throughout New England.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.