Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, March 13, 2012

SEC Charges Two Ameriprise Advisors with Insider Trading

The SEC charged two Ameriprise financial advisors with insider trading for more than $1.8 million in illicit profits based on confidential information about a Philadelphia-based insurance holding company’s merger negotiations with a Japanese firm.  According to the SEC, Timothy J. McGee and Michael W. Zirinsky, who are registered representatives at Ameriprise Financial Services, illegally traded in the stock of Philadelphia Consolidated Holding Corp. (PHLY) based on nonpublic information about the company’s impending merger with Tokio Marine Holdings. McGee obtained the inside information from a PHLY senior executive who was confiding in him through their relationship at Alcoholics Anonymous (AA) about pressures he was confronting at work. McGee then purchased PHLY stock in advance of the merger announcement on July 23, 2008, and made a $292,128 profit when the stock price jumped 64 percent that day.

In addition, according to the SEC’s complaint, McGee tipped Zirinsky, who purchased PHLY stock in his own trading account as well as those of his wife, sister, mother, and grandmother. Zirinsky tipped his father Robert Zirinsky and his friend Paulo Lam, a Hong Kong resident who in turn tipped another friend whose wife Marianna sze wan Ho also traded on the nonpublic information. The Zirinsky family collectively obtained illegal profits of $562,673 through their insider trading. Lam made an illicit profit of $837,975 and Ho, also a Hong Kong resident, profited by $110,580.

Lam and Ho each agreed to settle the SEC’s charges and pay approximately $1.2 million and $140,000 respectively.

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In my view, this complaint shows how unclear things still are as to why insider trading should be illegal, and in particular count as securities fraud. In this case, the SEC could not rely on the usual `tipper-tipee liability theory' as the PHLY executive obviously did not know or have any reason to believe that the material, non-public information (info) will be used for securities trading, nor did he get or expect any personal benefit. He disclosed this info in a rather unsusual setting - as an AA participant unloading his workplace woes.

Rather, the SEC latched on the duty of trust and confidence Ameriprise Advisors owed the PHLY executive. And where does that come from? The confidentialty requirement of AA - in particular, the Twelfth Tradition. When you need to appeal to AA code of conduct to claim securities fraud, something is definitely amiss!

Here in India, they resolved (or sidestepped) the issue by keeping insider trading distinct from securities fraud. Under the Securities and Exchange Board of India Act, Section 12A (a) thru (c) cover fraud, and (d) and (e) cover insider trading. Interestingly (d) prohibits insider trading, while (e) prohibits dealing in securities while in possession of material (OR) non-public information!

Posted by: Mangesh | Mar 15, 2012 2:37:50 AM

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