White Collar Defense Update

Notable Recent Decisions Under the False Claims Act--Part 2

Mon, 18 Feb 2013 10:24:03 -0500

This is the second installment of our four part series about notable recent decisions under the False Claims Act. This week's featured decision is United States ex rel. Glenda Martin v. Life Care Centers of America, Inc., 2012 WL 6084626 (E.D. Tenn., Nov. 15, 2012).

This case deals with the extent to which matters under the FCA should remain under seal, both during the pendency of the Government's pre-intervention investigation and thereafter. The specific issues presented were: whether the court should grant the Government's request to maintain several documents under seal after the Government intervened in an action; and whether a local newspaper should be entitled to intervene to oppose the requested seal. The District Court allowed the newspaper to intervene and denied the Government's request to maintain certain documents under seal. While the case involves narrow issues, the District Court's excoriation of the Government for what it believed to be its abuse of the sealing provisions of the FCA is priceless.

This case was filed in October 2008. The Government sought several extensions of the seal. On January 13, 2011, the Court granted the Government's request for an indefinite extension of time in which the Government could make its intervention determination, and it ordered that the case be administratively closed. In support of that request, the Government had filed a status report indicating that it was involved in a "nationwide investigation" of the defendant, that it "continues to devote significant time and resources to this investigation," that its investigation had already involved over 150 witnesses nationwide, that it intended to serve additional subpoenas, that it had made a "lengthy and detailed presentation" to the defendant, and that the defendant had requested time to consider the information presented.

In March 2012, the Government transferred a second qui tam case raising the same issues to the Eastern District of Tennessee and sought to consolidate the two cases. At a status conference held on consolidation request, the Government objected to a reporter's presence and asked that the courtroom be sealed. The Court then asked the parties to brief whether all pleadings in the case should remain sealed and whether the Court should close the courtroom for all future proceedings in the case.

Defrauded Peregrine Investors Seek Relief Against Banks

Sun, 10 Feb 2013 20:57:44 -0500

By Sehyung Daniel Lee

A recent Northern District of Illinois case concerning fraud against investors alleges causes of actions against the financial institutions where the investors' funds were being held. This case poses an interesting question as to whether financial institutions should have a heightened duty to monitor bank accounts that are known to be customer segregated accounts.

In In re: Peregrine Financial Group Customer Litigation, 12-C-5546, the plaintiffs are a class of customers of the Peregrine Financial Group, a futures commissions merchant. Plaintiffs allege a twenty year scheme of fraud and concealment by Russell Wasendorf, Sr., the founder of Peregrine, whereby Wasendorf would take funds from Peregrine's customer accounts located at US Bank and use the funds for his own personal use and gain or to cover Peregrine's business expenses. Funds looted included multi-million dollar transfers from customer segregated accounts at JPMorgan to bank accounts at US Bank. Wasendorf's fraud scheme involved intercepting mail sent to US Bank by his auditors or the National Futures Association ("NFA") and then forging responses to fool his auditors or the NFA. Wasendorf would also forge US Bank statements and other documents that reflected the balances in his U.S. Bank accounts. Using the forgeries, Peregrine convinced the NFA that it had over $200 million dollars in its bank accounts when it in fact had only $5 million.

Notable Recent Decisions Under the False Claims Act

Sun, 10 Feb 2013 20:38:03 -0500

By David M. Laigaie

Each week for the next four weeks, we will provide a summary of a notable recent decision under the False Claims Act. The first in this series is United States v. Kernan Hospital, 2012 WL 5879133 (D.Md., Nov. 20, 2012). Read the decision here: United States v. Kernan Hospital Memorandum Opinion.pdf

This case involves a motion to set aside a civil investigative demand ("CID") issued by the United States Attorney's Office for the District of Maryland, seeking documents from Kernan Hospital. The Government had already filed a False Claims Act suit against Kernan Hospital but the District Court dismissed it without prejudice pursuant to F.R.C.P. 9(b). After dismissal, the Government issued its CID. The District Court set aside the CID, holding that the False Claims Act expressly limits the Government's use of CID's to the period "before commencing a civil proceeding."

The Government alleged that Kernan devised a scheme to increase its Medicare, Medicaid, and Tri-Care reimbursement by systematically "upcoding" secondary diagnoses concerning malnutrition. Before filing its complaint against Kernan, the Government investigated the matter for three years. Specifically, pre-complaint proceedings included the issuance of an Office of Inspector General subpoena, the production by Kernan of 100 specifically identified medical records (15,686 pages of materials), the production by Kernan of the coding summary sheets corresponding to the 100 medical records, Kernan's production of an additional 3,000 pages of documents, the issuance of a September 7, 2011 CID seeking deposition testimony from Kernan's Director of Health Information Management, followed by her testimony two weeks later. The Government filed its FCA complaint in October 2011. The District Court dismissed the complaint under Rule 9(b) and, on August 23, 2012, the Government issued yet another CID on Kernan seeking many of the same documents that it had already sought and obtained.

As HIPAA Audit Pilot Program Ends, Providers Should Brace for More of the Same in 2013

Tue, 15 Jan 2013 12:08:53 -0500

By Mark A. Wachlin

The Health Information Technology for Economic and Clinical Health (HITECH) Act requires the Department of Health and Human Services (HHS) to provide for periodic audits to ensure that covered entities and business associates are complying with the HIPAA privacy and security rules and the HITECH Act's breach notification standards. To implement this mandate, the HHS Office for Civil Rights (OCR) piloted a program to conduct 115 audits of covered entities to assess privacy and security compliance. Audits conducted under OCR's pilot program began in November 2011 and ended in December 2012.

As part of the audit pilot program, OCR established an audit protocol that contains the requirements assessed during OCR's performance audits. The entire audit protocol is organized around modules, representing separate elements of privacy, security, and breach notification. (The protocol is available for public review at: http://www.hhs.gov/ocr/privacy/hipaa/enforcement/audit/protocol.html.) For example, with respect to the HITECH Act's breach notification standards, auditors checked, among other things, whether:

a process exists for notifying individuals within the required time period of a breach of unsecured protected health information (PHI);
if any breaches occurred, that individuals were notified within 60 days;
if there is a standard template or form letter for breach notification; and
if any breaches occurred, the notification to the individuals included the required elements set forth at 45 C.F.R. § 164.404(c).

In other words, the protocol provides a useful checklist for providers to ensure that they are complying with the HIPAA privacy and security rules and the HITECH Act's breach notification standards.

OCR has previously stated that the results of the initial audits will inform how audits will be conducted moving forward from the pilot program. It remains unclear how the initial audits will affect the existing audit protocol and whether OCR will revise the protocol. Until OCR provides notice that it is revising the existing protocol standards, providers would be well-served by continuing to compare their existing policies and procedures against the protocol's standards.

SEC Reports Whistleblower Program Gathered Steam in 2012

Tue, 15 Jan 2013 11:32:22 -0500

By Joseph U. Metz

Following the SEC's payment of its first Whistleblower award in the amount of $50,000, the SEC reports that its Whistleblower Program generated a total of 3001 tips through fiscal year 2012. Read the report here: SEC Annual Report on the Dodd-Frank Whistleblower Program 2012.pdf. Big payouts and many more cases are expected. The SEC also reported that whistleblower tips identified over half of all fraud schemes uncovered in public companies, while outsiders, including the SEC, only identified about 5% of such schemes.

As preciously discussed on this blog, the SEC's Whistleblower Program provides regulatory authority for the SEC to pay 10-30% bounties to whistleblowers whose tips lead to a SEC enforcement action with cummulative penalties of over $1,000,000. Fines, disgorgement and interest paid all count toward the $1,000,000 threshold. The determination of the actual percentage and amount of the award is within the discretion of the SEC which is to consider the significance of the tip, the degree of assistance provided and the "programmatic interest " of the SEC in the particular action.

Skeptics continue to voice concerns that some employees will "blow the whistle" only to get the substantial reward rather than pursue internal company procedures to avoid or limit improper conduct. Despite these reasonable concerns, the SEC Whistleblower Program and similar measures are unquestionably the trend in compliance legislation and hold great public appeal. Companies subject to SEC jurisdiction should govern themselves accordingly.

Pennsylvania Supreme Court Holds That No Interception Occurred Where Police Read and Replied to Defendant's Text Messages

Mon, 07 Jan 2013 17:31:10 -0500

By Christopher H. Casey

When it comes to wiretapping, Pennsylvania is a two-party consent state--meaning both parties to a conversation must consent before a wire, electronic or oral communication is intercepted for the interception to be lawful. Although there are exceptions available, sometimes the "two-party" requirement in the Pennsylvania Wiretapping and Electronic Surveillance Act ("Wiretap Act") presents difficult issues for law enforcement. But in order for the Wiretap Act to even apply, there must be an interception of a communication. In Commonwealth v. Cruttenden, decided on December 17, the Pennsylvania Supreme Court narrowed the circumstances in which an interception occurs.

Cruttenden started out as an ordinary car stop along interstate 80 in Clearfield County. After the Pennsylvania State Troopers obtained consent to search the car, they found 35 pounds of marijuana, methamphetamines, drug paraphernalia, a .45 caliber handgun, and a cell phone. One of the car's occupants told the troopers that he had been using the cell phone to text one of the two defendants concerning an exchange of the marijuana for $19,000. The trooper, posing as the supplier, used the phone to text that defendant, and a meeting was set up. The two defendants arrived at the meeting place to conduct the transaction and were arrested. Both defendants were charged with attempt and conspiracy, and both filed motions to suppress the texts, claiming that the texts had been unlawfully intercepted under the Wiretap Act.

The trial granted the suppression motion. On appeal to the Superior Court, the Commonwealth argued that under a Superior Court case called Commonwealth v. Proetto, no interception had taken place and therefore the Wiretap Act did not apply. The Superior Court disagreed and affirmed the suppression order.
In Proetto, an officer, posing as an underage female, communicated with a suspected sexual offender in an Internet chat room using the screen name "Kelly15F." The Superior Court held that because the officer was a direct party to the conversation in the chat room, there was no interception and the Wiretap Act did not apply. But in Cruttenden, the Superior Court distinguished Proetto, on the basis that in the chat room the officer, rather than posing as an actual person, created an entirely separate computer profile, misrepresenting himself as a fictional person, "Kelly15F," while in Cruttenden the officer misrepresented himself as the intended recipient of the communication, namely the defendant's drug supplier. In effect, the Superior Court seemed to be saying, "if you pose as the intended recipient, as opposed to creating a totally separate identity, you have intercepted the communication and the Wiretap Act is violated."

The Supreme Court disagreed and reversed the Superior Court, calling the respective factual circumstances in the two cases "distinctions without a difference." It does not matter, the Supreme Court held, who the intended recipient of the communication is--"the fact which takes the case out of the purview of the Act is that [the defendant] elected to communicate with the person answering the call and that the communication was direct. Therefore, there was no eavesdropping or listening in, and no interception took place."

The effect of the Cruttenden decision is significant, particularly given the ease with which people today text each other. Any time a person texts, he or she is taking a risk that the person on the other end is a police officer. In Cruttenden, the defendant involved in the texts was suspicious and texted questions that only his drug supplier would know. When he got the right answers, he thought he was in the clear and proceeded to set up the rendezvous spot. What he didn't know was that his supplier was feeding the trooper the answers. After Cruttenden, the Pennsylvania Wiretap Act will not save the casual texter.

Requiring Mutual Discovery at Sentencing--Middle District Leads the Way in PA

Wed, 05 Dec 2012 14:24:06 -0500

By Christopher H. Casey

In federal court, a defendant is entitled to pre-trial discovery under Rule 16 of the Federal Rules of Criminal Procedure. This is an important due process protection that allows a defendant to know what he will be facing at trial. But what about at sentencing? Since most federal cases are resolved through guilty pleas, isn't it equally important to get copies of what the prosecutor provides to the probation officer to determine the Guidelines range? One would think so, but in most federal courts such disclosure during the sentencing phase is not required. Fortunately, a slow change seems to be underway, led by the Middle District of Pennsylvania.

Unlike Rule 16, Rule 32 of the Federal Rules, which governs the sentencing procedure, does not require the disclosure of any material to the defense. The rule merely states that the probation officer must conduct a pre-sentence investigation and prepare a pre-sentence report. Some districts' local rules provide further guidance. For instance, the Eastern District of Pennsylvania Local Criminal Rules require the government to make available to the probation officer "all investigative and file material relevant to the case," but do not require that the material be disclosed to the defendant or his attorney. In practice, the probation officer typically relies upon evidence collected by the prosecution in the investigation to provide the factual support for such critical determinations as drug quantity, loss amount, the defendant's role in the offense, etc. The probation officer's decision on such determinations can have a significant effect on the Guidelines calculation, and ultimately the sentence. It seems natural, then, that the defense should have access to the documents that support the factual basis for such determinations.

So far, in Pennsylvania at least, only the Middle District of Pennsylvania has decided to change the rules to require reciprocal discovery during the pre-sentence investigation phase of a case. As explained by former Eastern District U.S. Attorney Peter F. Vaira in a recent article, the Middle District has amended its Local Rules to require mutual discovery of all material supplied to the probation officer for use in the pre-sentence report. The new rule (LCrR 32.1) states that "[t]he government shall provide to the defendant's counsel a copy of any documentary information provided to the probation officer to be considered in the preparation of the pre-sentence report at the same time as it is provided to the probation officer." The rule is reciprocal: "[t]he defendant or the defendant's counsel may submit documentary information to the probation officer and shall provide a copy to the attorney for the government at the same time as it is provided to the probation officer."

Continue reading after the jump.

Middle District of PA Holds Quid Pro Quo Not Necessary To Charge Violation of 18 U.S.C. §666

Tue, 27 Nov 2012 18:36:47 -0500

By David M. Laigaie

18 U.S.C. §666(a)(1)(B) prohibits, among other things, state government officials from accepting anything of value with an intent to be influenced or rewarded in connection with business related to the state government. There is a split amongst the circuits as to whether a conviction under §666 requires that the official actually confer some benefit in return for the payment (e.g., a quid pro quo). The Fourth and Second Circuits have held that a conviction under §666 requires a quid pro quo. The Sixth, Seventh, Eighth and Eleventh Circuits have held that a conviction under §666 does not require a quid pro quo. The Third Circuit has not ruled on this issue.

On November 21, 2012, Judge A. Richard Caputo, United States District Judge for the Middle District of Pennsylvania, held that no such quid pro quo is necessary:

The text of §666 only requires Defendants to accept or agree to accept anything of value with the intent to be influenced or rewarded in connection with any business or transaction...

The case, United States v. Musto, Case No.: 3:10-CR-338, involves charges against a former Pennsylvania State Senator, Ray Musto, who was indicted for accepting more than $28,000 from a construction company that sought preferential treatment in relation to certain state financed projects. The construction company at issue (although not named in the indictment) has subsequently been identified as Mericle Construction, whose principal, Robert K. Mericle, pled guilty in 2009 for a crime related to the corruption cases against former Luzerne County Judges Michael T. Conahan and Mark A. Ciavarella. In their motion to dismiss, Musto's attorneys argued that the indictment was factually insufficient because it did not plead that Mericle Construction received anything in return for the money that it allegedly paid to Musto. Judge Caputo disagreed, noting that while such a quid pro quo "is sufficient to violate [§666], it is not necessary."

Judge Caputo's memorandum opinion is attached here: United States v. Raphael Musto Memorandum Opinion on Motion to Dismiss.pdf

Department of Justice Publishes Business Persons' Resource Guide to the FCPA

Mon, 19 Nov 2012 16:20:21 -0500

By Joseph U. Metz

The Criminal Division of the United States Department Of Justice has just published a 125-page "Resource Guide" to give both non-lawyers and lawyers at least some clarification in the real world workings of the Foreign Corrupt Practices Act ("FCPA"). Link to the FCPA Resource Guide here: FCPA Guidebook 2012.pdf. The Resource Guide is written in a conversational, non-legalistic style that business persons will likely find helpful. Business persons who conduct business in foreign countries have complained for many years that the practical workings of the FCPA were ambiguous, at best. Employees of American corporations abroad were unsure whether whether relatively minor conduct might be enough to amount to a violation of the law subjecting their employer and themselves to horrific penalties. There were many rumors of "zero tolerance" for even the most abstract payments and no place to quickly consult for an authoritative answer. The Resource Guide, while not perfect, at least partially fills that gap.

The most valuable part of the Resource Guide is the section that lists numerous travel, gift and entertainment hypotheticals that sound very much like real life situations that a corporation engaging in foreign commerce might run into. The first hypothetical for example finds no fault with an American company which provides business class airfare to foreign senior officials traveling a long distance to examine the company's facilities and products especially since the company's own employees would be entitled to such an upgraded ticket if they were on a journey of similar length. The hypothetical continues to find no fault with taking the foreign officials to a reasonably priced dinner, a baseball game and a play. The line is crossed in the hypothetical, however if the foreign officials are given first class tickets, told to bring their spouses and given a week long, all expenses paid trip to Las Vegas after the review of the more mundanely located factory.

Continue reading after the jump.

Attennnnn-tion! 4 Important Lessons From the General Petraeus Scandal

Fri, 16 Nov 2012 15:51:57 -0500

By Sehyung Daniel Lee

The dirty details of this presently unfolding scandal do not require repetition on this page. Google will lead you to all that you want (and don't want) to know about these sordid details. However, you won't read much of the following advice in the mainstream media. So, here we go ...

1) Discuss business on corporate e-mail accounts only

The FBI's cyberstalking investigation led to a personal Gmail account, which the government accessed and ultimately resulted in the downfall of General Patraeus. A recent Google transparency report revealed that it has fully or partially complied with at least 90% of the U.S. government's nearly 8,000 requests for user data during the first half of 2012. http://www.google.com/transparencyreport/userdata requests/ The lesson learned is that it is much easier for the government to get e-mails from Gmail, then from your own IT department. This is information that (1) you do not control; (2) might not have notice that the government has requested access to; and (3) do not have say whether the communications are protected by some privilege or confidentiality clause. As a corporation, there are many things that you might want to keep quiet: trade secrets, potential business deals, future products, etc. As Google does not have your company's interests at heart, having employees discuss these developments through personal e-mail accounts could lead to their public disclosure. Further, you would receive no notice that the information has been sought out by the government. Therefore, reminding your employees to keep business e-mails on corporate e-mail accounts will prevent your company's private issues from going public.

2) Be careful who you are e-friends with

While investigating the cyberstalking complaint, the e-mails of the victim led to the discovery of potentially inappropriate e-mails of another senior general who was uninvolved in the original cyberstalking charge. Now that senior general is being investigated. The lesson learned here is that the government, while investigating someone else on a matter unrelated to you, could come to learn information that would place you or your corporation under surveillance or investigation. Therefore it is imperative that not only you keep your corporate and personal e-mails separate (see point 1), but also that you know the person who are sending the e-mails to. A joke in poor taste to someone under surveillance could result in you landing in hot water.

Continue reading after the jump.

Financial Advisor Convicted of Insider Trading for Trading on Info Received at AA Meeting

Fri, 16 Nov 2012 15:39:22 -0500

By Sehyung Daniel Lee

Here is an update to our October 8, 2012 post about an insider trading case involving information received at an Alcoholics Anonymous ("AA") meeting.

On November 15, 2012, a jury in the Eastern District of Pennsylvania found Timothy McGee guilty of insider trading based on his use of information he received from a fellow member of his AA group. McGhee was a financial adviser for Ameriprise Financial Services Inc. As you may recall, a corporate executive of Philadelphia Consolidated Holding Corporation ("PHYL") who was also a member of McGhee's AA group spoke to McGhee about his struggles arising out of the stress created by the pending acquisition of PHYL. McGee used that knowledge to purchase PHYL stock in advance of the acquisition transaction, netting almost $300,000 after the company went public. In less than four hours, a jury determined that McGee was guilty of acting on insider information. Sentencing has been scheduled for February 20, 2013 and McGee could face up to 25 years in prison. In addition, McGee also faces a civil suit, which had been stayed pending the outcome of the criminal trial, based on the $1.5 million that others netted from his disclosure of the information.

Internal Investigations and Attorney-Client Privilege: CAVEAT SPEAKER

Thu, 08 Nov 2012 10:43:34 -0500

By David M. Laigaie

Joseph M. Elles, Carter's Inc.'s former Vice President of Sales, is facing federal criminal charges alleging that he aided Carter's in misstating its income in various Securities and Exchange Commission filings. The case is United States v. Elles, No. 1:11-CR-445 (N.D. Ga). Elles has objected to the government's attempts to introduce into evidence statements that he made to attorneys conducting an internal investigation for Carter's. (See U.S. v. Elles Response in Opposition to Motion to Admit Defendant's Statements.pdf) The government contends that Elles admitted his guilt during the course of a seven hour interview with counsel that conducted the internal investigation. Elles disagrees, arguing that his statements are "a far cry from the elements necessary to prove guilt beyond a reasonable doubt as alleged."

Elles raises several arguments why his statements should not be admitted. First, he claims that his cooperation with the internal investigation was coerced because Carter's said it would withhold his severance payments if he did not participate. He also attacked counsel's motives, calling them "former SEC and AUSA attorneys [who] were working hand in glove with prosecutors." As proof of this collusion, Elles pointed out that Carter's immediately waived privilege and turned over his interview to the FBI and the United States Attorney's Office the day after the interview was conducted. Elles also argues that if the portion of the interview that the government seeks to introduce is allowed, that he should be allowed to introduce other portions of his interview (which was summarized by counsel in a 33 page memorandum) and to cross examine the attorneys who conducted the interview to explain the context of his statements and to demonstrate that, as Vice President of Sales, he was not responsible for deciding how "accounting issues" were to be reported on financial statements.

Mr. Elles' co-defendant, Carter's former President, Joseph Pacifica, has similarly objected to the admission of statements he made to counsel during Carter's internal investigation.

This case highlights a critical dynamic concerning internal corporate investigations. Corporate employees who cooperate in such investigations do so at their own peril. The corporation will ultimately decide whether to assert or to waive privilege. And where, as here, the corporation decides to waive privilege, an individual employee who is incriminated by information over which privilege is waived has little recourse or ability to stop the damage. Our rule, therefore, for corporate employees deciding whether to participate in an internal investigation is caveat speaker.

Purdue Executives Continue Battle Against Broad Application of Medicare Exclusion Statute

Mon, 22 Oct 2012 18:23:51 -0500

By Mark A. Wachlin

On October 15, 2012, three former Purdue Frederick Company executives filed a Petition for Rehearing En Banc before the U.S. Court of Appeals for the District of Columbia Circuit. (Click here to view a copy of the petition: Petition for Rehearing En Banc.pdf). The petition is the latest chapter in the saga of these three former executives who pled guilty to misdemeanor misbranding under the "responsible corporate officer" doctrine in connection with the plea of Purdue to felony misbranding of the drug OxyContin. The Office of Inspector General ("OIG) for the U.S. Department of Health and Human Services subsequently excluded these individuals from participation in all Federal health care programs under its permissive exclusion authority set forth at 42 U.S.C. § 1320a-7(b)(1) and (3) for 20 years. During their various challenges to their exclusions, the executives have successfully reduced the length of the exclusion from 20 years to 12 years, which is cold comfort since the exclusion effectively ends all of their careers in the health care arena.

In July, a three-judge D.C. Circuit panel held in Friedman v. Sebelius that section 1320a-7(b)(1) authorizes the OIG to exclude from Federal health care programs an individual convicted of a misdemeanor "if the conduct underlying that conviction is factually related to fraud." The specific statutory section at issue in the case is section 1320a-7(b)(1), which provides that the Secretary of HHS may exclude any individual that has been convicted of a criminal offense consisting of a misdemeanor relating to fraud. The specific issue before the D.C. Circuit was whether the phrase "misdemeanor relating to fraud" in section 1320a-7(b)(1) refers to a generic criminal offense or to the facts underlying the particular defendant's conviction.

Continue reading after the jump.

Twelve Steps to Insider Trading

Mon, 08 Oct 2012 11:16:58 -0500

By Sehyung Daniel Lee

Using information learned from a fellow Alcoholics Anonymous ("AA") member to make money in the stock market may be morally dubious. Should it be a federal crime, however? A recent case in the Eastern District of Pennsylvania, United States v. McGee, Crim. No. 12-236, deals with this very question.

The defendant, Timothy McGee, was a member of AA. He and a senior executive of Philadelphia Consolidated Holding Corporation ("PHYL") formed a close personal relationship while attending AA meetings, whereby they shared confidences in their struggles with alcoholism. The senior PHYL executive revealed to McGee that he was under a great deal of stress due to the pending acquisition of PHYL. McGee then purchased shares of PHYL which he sold for a $292,128.00 profit after the acquisition was announced. McGee was indicted for insider trading.

There are two bases for insider trading. The first is the classic situation where a corporate insider trades in securities using material, nonpublic information he or she obtains as a result of his or her insider position. The second, the misappropriation theory, occurs when an outsider, who has a "duty of loyalty and confidentiality" to an inside source of nonpublic information, uses information learned from that insider to trade in securities. Determining the existence of such "a duty of loyalty and confidentiality" is tricky. To help define when such "duty of loyalty and confidentiality" exists, the SEC promulgated Rule 10b5-2, codified at 17 C.F.R. 240.10b-5. According to Rule 10b5-2(b)(1) and (2), such duty arises where there is an agreement to keep the information confidential, and/or when the parties have a "history, pattern or practice of sharing confidences, such that the recipient of the information knows or reasonably should know that the person communicating the material nonpublic information expects that the recipient will maintain its confidentiality." In order to prove a violation of the misappropriation theory, the government must prove that the defendant knew that his conduct was unlawful.

In McGee, the government contended that, as part of AA's tradition, AA members agree to keep information they share confidential. The government further contended that there existed a history of shared confidences between McGee and the insider. Thus, the government argued, McGee had a "duty of loyalty and confidentiality" to keep information learned form the insider confidential. McGee moved to dismiss, arguing that there existed no duty precluding him from trading on the information and that he did not know that he was breaking the law when he traded on the information. The court denied the motion and held that the jury would have to decide whether McGee's relationship with the corporate insider featured a "duty of loyalty and confidentiality" and whether the information about the acquisition was disclosed within the confines of that relationship.

A Day on Health Law: False Claims Act Update

Sun, 07 Oct 2012 08:55:09 -0500

By David M. Laigaie

Wednesday, October 10, 2012

The CLE Conference Center
Wanamaker Building, 10th Floor, Suite 1010, Philadelphia

Hosted by the Pennsylvania Bar Institute, this full day program addresses the latest hot topics in health law. David M. Lagaie, Dilworth Paxson Partner and Chair of the firm's White Collar practice will join a panel discussion of the most notable False Claims Act cases from the past year.

For additional information and to register, click here www.pbi.org. Simulcast available throughout the state. CLE Credits will be offered!