United States: First Circuit Affirms Another Insider-Trading Conviction

The U.S. Court of Appeals for the First Circuit yesterday affirmed another conviction in a pair of appeals arising from insider-trading prosecutions. The decision in United States v. McPhail confirms that, under current First Circuit precedent, a tipper of inside information can receive "personal benefits" based on expectations of a free dinner, wine, and a massage parlor, on "kickbacks" from a tippee-friend's trades, and on his tippee-friends' "general gratitude for his largesse."

Factual Background

The McPhail case involved allegedly material, nonpublic information that a corporate executive had provided to McPhail. The executive and McPhail had allegedly had a close relationship and a history, pattern, and practice of sharing professional and personal confidences so that the executive purportedly had reason to believe that McPhail would not disclose the confidences. McPhail did not trade on the information from the executive, but he allegedly told several of his "golfing buddies" (including Parigian) about it, and the tippees traded on it.

The Government indicted McPhail (and Parigian) under the misappropriation theory of insider trading, contending that McPhail had breached a duty of trust and confidence to the executive by misappropriating the confidential information disclosed to him and relaying it to Parigian and others in exchange for personal benefits. McPhail was convicted, and he appealed. Parigian conditionally pled guilty, but preserved his right to challenge the sufficiency of the indictment.

The First Circuit affirmed Parigian's conviction in May 2016. And the First Circuit affirmed McPhail's conviction yesterday.

First Circuit's Decision

Duty of Trust and Confidence

The court first held that, based on the evidence at trial, the jury could have concluded that McPhail and the executive had shared a relationship of trust and confidence under SEC Rule 10b5-2(b)(2), which provides that a "duty of trust or confidence" exists between the communicator and the recipient of material, nonpublic information when the communicator and the recipient "have a history, pattern, or practice of sharing confidences, such that the recipient of the information knows or reasonably should have known that the [communicator] expects that the recipient will maintain [the information's] confidentiality."

The evidence showed that McPhail and the executive were "frequent golf partners" and "close friends," who traveled on vacation and attended sporting events together, "communicated daily and saw one another several times a week." The executive had loaned money to McPhail "to pay off a gambling debt that McPhail was trying to hide from his wife," and he later forgave the debt entirely. The executive's wife also "asked McPhail to mediate a marital argument that threatened [the executive's] marriage."

The court noted that McPhail had not challenged the SEC's statutory authority to promulgate the rule, so the court "assume[d] without deciding that Rule 10b5-2(b)(2) constitutes a valid exercise of administrative rulemaking."

Mens Rea Requirement

McPhail took issue on appeal with the jury instructions' use of Rule 10b5-2(b)(2)'s "knew or should have known" language. He contended that the District Court should have required the jury to find that he had "known" he was breaching his duty to the executive, not merely that he "'knew or reasonably should have known' that the [executive] expected him to keep the information secret."

The First Circuit held that its Parigian decision "suggests that the instruction was likely error." However, the court concluded that McPhail might have waived his challenge to the jury charge and that, in any event, he had forfeited it, "triggering a review for only plain error."

The First Circuit did not find plain error in the instructions. Rather, the court observed that "we have not actually held that [such an instruction] is error, and at least two circuit courts have expressly blessed the 'knew or reasonably should have known' standard." The court cited decisions from the Sixth and Seventh Circuits.

Receipt of Personal Benefits

The First Circuit also held that the evidence had sufficiently established that McPhail had received personal benefits in exchange for tipping the material, nonpublic information to Parigian and others. As in the Parigian case, the court assumed that the personal-benefit requirement applies in misappropriation cases, not only in classical insider-trading cases (where an insider trades on confidential corporate information or discloses it in exchange for a personal benefit). And as in Parigian, the court acknowledged that "the nature of the personal benefit requirement in insider trading cases is the source of some inter-circuit tension likely to be resolved by the Supreme Court in its next term."

However, the court held that, under current First Circuit precedent, the personal-benefit requirement can be "satisfied by benefits as thin as 'reconciliation with [a] friend' and the maintenance of 'a useful networking contact,' . . . or 'the mere giving of a gift to a relative or friend.'" Those standards were met in this case based on the three types of personal benefits identified at trial: "McPhail's expectations that he would receive a free dinner, wine, and a massage parlor visit from the beneficiaries" of his tips; his receipt of "a $3,000 'kickback'" from a tippee-friend who had obtained nearly $200,000 in trading profits; and the benefit of the tippee "group's general gratitude for his largesse." "Jurors were told: 'It makes him one of the guys, they're all kind of impressed.'"

What the Court Did Not Decide

As noted above, the McPhail decision did not decide a number of potentially important issues.

First, the court did not decide whether the SEC had statutory authority to promulgate Rule 10b5-2(b). Other courts, such as the Third Circuit, have upheld the rule.

Second, because of the waiver/forfeiture analysis, the court did not decide the validity of a "knew or should have known" standard for mens rea in a criminal case. However, the court suggested, as it had done in Parigian, that such a standard is inappropriate – although the First Circuit acknowledged that other circuits have concluded otherwise.

Third, the court did not decide whether a tipper must have received a personal benefit in a misappropriation case. The court simply assumed that the requirement applies. Other courts, including the Second Circuit, have said that the requirement applies in both misappropriation and classical insider-trading cases.

Fourth, as in Parigian, the court declined to enter the debate involving the Second and Ninth Circuits' potentially conflicting constructions of the "personal benefit" requirement. All eyes will be on the Supreme Court next term when it considers the Ninth Circuit's decision in United States v. Salman.

We previously blogged about the McPhail and Parigian cases here and here.

First Circuit Affirms Another Insider-Trading Conviction

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.

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.


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.