A financial adviser who made more than $250,000 trading on insider information he got from a fellow Alcoholics Anonymous member failed in his bid to overturn his conviction by challenging the validity of the rule he violated. Timothy McGee, who was convicted by a jury in 2012 of securities fraud, had argued to the U.S. Court of Appeals for the Third Circuit that the U.S. Securities and Exchange Commission's rule triggering liability for use of misappropriated information in trading is invalid since it doesn't require a fiduciary relationship between the person who used the misappropriated information and the source of that information. The Third Circuit, in a matter of first impression, held that the SEC was within its rights to create the rule because Congress had left open the particulars of regulating manipulative or deceitful trade practices for the SEC to fill in. So, under the standard requiring courts to show deference for agency interpretations announced by the U.S. Supreme Court in its 1984 decision Chevron v. Natural Resources Defense Council, the agency is afforded broad discretion in its rulemaking, the Third Circuit held. "Although we are not without reservations concerning the breadth of misappropriation under Rule 105b-2(b)(2), it is for Congress to limit its delegation of authority to the SEC or to limit misappropriation by statute," Judge Ruggero J. Aldisert wrote in the opinion for the three-judge panel. "It is not the role of our court, 'even if the agency's reading differs from what the court believes is the best statutory interpretation,'" he said, quoting from the U.S. Supreme Court's 2005 opinion in National Cable & Telecommunications Association v. Brand X Internet Services. The Securities Exchange Act of 1934 created the SEC and, under Section 10(b), conferred upon it the power to enact rules and regulations to deter manipulation of the market, according to the opinion. "The SEC acted on this broad delegation of rulemaking authority by promulgating Rule 10b-5, which makes it unlawful for any person, in connection with the purchase or sale of any security, to 'employ any device, scheme, or artifice to defraud,' or to 'engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,'" Aldisert said. Since then, the U.S. Supreme Court has recognized two theories of insider trading under that rule—traditional and misappropriation. The first concerns those who are inside a corporation and trade on information they have about that corporation that isn't available to the public. The second involves deceptive trading by those outside of a corporation who don't owe a duty to shareholders. "It occurs when a person 'misappropriates confidential information for securities trading purposes, in breach of a duty [to disclose] owed to the source of the information,'" Aldisert said, quoting from the U.S. Supreme Court case that established the theory in 1997, United States v. O'Hagan. "If the trader discloses to the source his intent to trade, there is no deception and no Section 10(b) liability." The judge explained, "Deception through nondisclosure, therefore, is the crux of insider-trading liability." Other cases emphasized that the duty to disclose is based on the relationship between the parties, not on the possession of the information. "Accordingly, under either theory, 'there can be no fraud absent a duty to speak,' and the duty to speak arises from a 'relationship of trust and confidence,'" Aldisert said, quoting from another Supreme Court case, Chiarella v. United States, issued in 1980. The high court hasn't given much guidance on what relationships can give rise to a duty to disclose for misappropriation, Aldisert said. "Prompted by inconsistent treatment among lower courts, the SEC promulgated Rule 10b5-2 'to clarify and enhance' the misappropriation theory in light of O'Hagan," Aldisert said. That rule identified three categories of qualifying relationships, the second of which is at issue in this case. It states that the duty exists when there is a "history, pattern, or practice of sharing confidences between the parties," according to the opinion. McGee met an insider at Philadelphia Consolidated Holding Corp., a publicly traded company, around the year 2000 in Alcoholics Anonymous. McGee began informally mentoring him for about a decade, during which they biked together and competed in triathlons. In early 2008, the man was involved in negotiations to sell the corporation, the stress of which led to a drinking episode in June, followed by a renewed interest in attending AA meetings. At one of those meetings, he told McGee about the impending sale of the company. Shortly after that conversation, McGee bought a substantial amount of stock in the company, prompting the SEC to investigate him after the sale was publicly announced, according to the opinion. McGee had argued to the appeals court that he and the other member of AA didn't have the requisite relationship to trigger misappropriation liability and that the information wasn't disclosed within the scope of a protected relationship. The court disagreed on both fronts. "For almost a decade, McGee informally mentored [the man], who entrusted 'extremely personal' information to McGee to alleviate stress associated with alcohol relapses. Confidentiality was not just [the man's] unilateral hope; it was the parties' expectation. It was their 'understanding' that information discussed would not be disclosed or used by either party," Aldisert said. As to whether the information was shared within the scope of the relationship, Aldisert noted that McGee had struck up the conversation with the man directly after an AA meeting and "McGee, a savvy investment adviser, feigned fidelity to [him] and did not disclose his intent to use the information to his pecuniary advantage by trading in PHLY."