A while back I wrote:
I don't play a lot of golf, but if you told me that the point of the sport is to walk around and exchange stock tips in the open air I would not be the least bit surprised.
I received some angry correspondence over that line, and I am now prepared to retract it. Apparently golfers don't walk around exchanging stock tips in the open air. They exchange stock tips over e-mail:
This insider trading case concerns McPhail’s exploitation of a close personal relationship with a senior executive of American Superconductor Corporation (“AMSC”) in order to serially tip material nonpublic information about AMSC to at least six individuals, most of whom were fellow competitive amateur golfers in the New England area.
McPhail’s source of inside information was, at all relevant times, a member of AMSC’s senior management (and is referred to herein as the “AMSC executive”). McPhail and the AMSC executive became friends as members of the same country club. They frequently played golf and socialized together, both at and away from the club. As part of this relationship, they often shared personal confidences about work and family life.
From at least July 2009 through April 2011, McPhail misappropriated material nonpublic information -- concerning AMSC quarterly earnings, contracts and other major corporate developments -- disclosed to him in trust and confidence by the AMSC executive. McPhail repeatedly tipped the yet-to-be released news about AMSC to other golfing friends with whom he stayed in regular contact through a group email chain.
That comes, of course, from a Securities and Exchange Commission complaint filed today, because of course some of Eric McPhail's golf buddies traded short-dated options, and of course the SEC caught them, and of course several of them settled for civil penalties and, presumably, turned over the e-mails to be used as evidence against the others.
How do those e-mails look? Here's one from McPhail to the group:
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. It could be done in the next few days … if it is not done/announced by Thursday, it will not be announced until the week of the 12th because all of China shuts down on vacation for 10 days -- starting Friday. 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, provided the market cooperates that day.
I like Pinot Noir and love steak….looking forward to getting paid back.
Good Luck …. SHHHHHHHHHHHHH!!!!!!!!!!!!!!!!!!
This is the Platonic ideal of an insider trading e-mail:
- Contains specific deal information.
- States the materiality of that information ("should spike them close to 10%").
- States the non-publicness of the information ("SHHHHHHHHHHHHH!!!!!!!!!!!!!!!!!!").
- States that the information was passed on for personal benefit ("I like Pinot Noir and love steak").
That last bit seems especially egregious to me. You are insider trading over an e-mail chain with your golf buddies. Of course you like Pinot Noir and love steak. You don't need to say it! Come on, you are a stereotype.
This whole thing is a stereotype. The other day I described "the old-fashioned, stupid way" of insider trading -- buddy tells you about takeover, you trade options, you cut him in on it -- and, according to the SEC's complaint, this is it almost exactly. That description ended with, "I write something about you to the effect of, come on, insider trading is dumb, you are dumb," and, I'm not prepared to retract that yet.
Almost exactly though. There's one little wrinkle in this case. Notice that the "here's the information, where's my steak" e-mail came from McPhail. McPhail was never an insider at AMSC; "he worked for a stone fabrication company." The information that he passed on to his golf buddies in exchange for steak came from the AMSC executive, who was another golf buddy of his. For insider trading to be illegal, as I never tire of reminding you, it must be passed on "in breach of a fiduciary duty or other relationship of trust and confidence," and in exchange for a personal benefit to the tipper. This is a low standard -- a steak dinner is way more than enough to meet it -- but there needs to be some benefit, and it seems like the tippees need to know about the benefit.
In this case, the SEC does not claim that the AMSC insider -- who is never named -- received a benefit or breached his duty. Instead the claim is that McPhail "expected to, and in fact did, receive a benefit from passing along the material nonpublic information he learned from the AMSC executive." And that McPhail breached "the duty of trust and confidence he owed the AMSC executive."
That duty being the duty of confidentiality you owe to your golf buddies:
McPhail and the AMSC executive initially became friends as members of the same country club.
By 2009, McPhail and the AMSC executive had developed a particularly close bond, communicating almost daily and playing golf or otherwise socializing together on a regular basis. When McPhail, who joined the club after marrying a member, was getting a divorce and in jeopardy of losing his membership, the AMSC executive successfully petitioned the club president to allow McPhail to remain a member. Another time, the AMSC executive paid off a $6,000 gambling debt for McPhail.
In the context of this relationship, McPhail and the AMSC executive exchanged intimate and confidential details about their personal and professional lives, relying on each other for support and advice. Among other things, McPhail confided in the AMSC executive about his divorce and the terminal illness of a family member. Among other things, the AMSC executive shared with McPhail the stresses of his job as a senior officer at a public company. ....
Based on their history, pattern, and practice of sharing confidences, McPhail knew or reasonably should have known the AMSC executive expected McPhail to maintain the confidentiality of the material nonpublic information communicated to him by the AMSC executive.
In some ways this is (allegedly!) the simplest dumbest most stereotypical insider trading ring imaginable. And yet even in its simplicity it is a good illustration of how bizarre American insider trading law is. The SEC, to prove its case, must show (1) that Eric McPhail gave his buddies material nonpublic information (seems easy), (2) that he did it for a benefit to himself (again, easy, steak), and (3) that he had, and knew he had, a legal duty to keep his golf buddy's secrets. Our insider trading law is so goofy that it requires our national securities regulator to go to court to stand up for the sanctity of the golfing relationship.
I'm speculating a bit here on the investigative process; the SEC, for obvious reasons, isn't totally transparent about that. But
- screen for suspicious trades,
- catch a pattern of suspicious trades by several people in one stock over time,
- lean on the suspicious traders to come clean, pay small fines, and rat out their friends in exchange for not facing criminal charges,
But who is sort of a fascinating character. He was apparently all ready to retire if he could hit one last deal, and when the deal fell apart so did he:
In an internal email sent that morning to another employee with knowledge of the news, the AMSC executive stated: “We just pushed out success by at least 5 years in my opinion … no money for us in this company now for several years … can see options expiring now for no value … I’m [expletive].”
Later that day on March 31, 2011, McPhail and the AMSC executive exchanged several emails in which the AMSC executive alluded to significant problems at AMSC. In response to some correspondence among McPhail and other friends, the AMSC executive responded to McPhail only, stating: “I am having a real bad day. Don’t even have the energy to chime in. I feel like throwing up. Will need to hit superfecta this year for sure now!!!! If u know what I mean. I will be working for a long time now.” McPhail responded: “I am having a terrible day today. Worst one yet. Your bad days are worse than mine, but I like the upside of your good days.” The AMSC executive in turn stated: “No upside in sight for me for over a year ………”
After a brief exchange about McPhail’s own work issues, the AMSC executive then added: “Gotta keep reminding myself only health matters …….. so what if I am about to lose about $890,000 of after tax money …….. my wife and kids are doing fine and I am still healthy enough to work ……...” McPhail then attempted to elicit additional information, asking “How so? Stock only down short money.” The AMSC executive did not respond further.
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