Appeals Panel Affirms Conviction for Bar Napkin Stock Tip


GolfGolf affords the opportunity for players to enjoy fresh air, camaraderie and friendly competition. At one Boston-area country club, the game also allows players to engage in criminal insider trading. A panel of the U.S. Circuit Court of Appeals for the First Circuit, including retired Associate Justice David H. Souter, affirmed the insider trading conviction of Robert Bray for buying a large amount of a thinly-traded bank stock after receiving a tip from a fellow club member of a pending acquisition. The case marks the third time since May 2016 that the First Circuit has affirmed the insider trading convictions of members of the Oakley Country Club in Watertown, Mass., and at least one other member, J. Patrick O'Neill, pleaded guilty in December 2014 to conspiracy charges in the Bray case.

As charged, O'Neill, a former senior vice president at Eastern Bank Corp., learned through his employment that Eastern Bank was planning to acquire Wainwright Bank & Trust Co. O’Neill performed due diligence on Wainwright as a potential takeover candidate, and signed a confidentiality  agreement with Eastern that required him to keep the nonpublic information he learned about Wainwright confidential. At the club bar, Bray told O'Neill that he needed to make a "big score" in order to help fund one of his real estate projects and asked if O'Neill had any "bank stock tips" for him. According to O'Neill, Bray had never sought a "big score" from him before or requested advice based on an express need for money. O'Neill mentioned several local banks, but then wrote "Wainwright" on a napkin and gave it to Bray, commenting that "this could be a good one." O'Neill did not explicitly inform Bray about his confidentiality agreement or the source of his Wainwright tip. Bray thanked O'Neill for the tip and, unprompted, offered him an opportunity to invest in the real estate project for which he requested the tip in the first place.

In the next two weeks, Bray sold off much of his portfolio and used the proceeds to purchase 31,000 Wainwright shares. His purchases accounted for approximately 56 percent of the total trading volume in Wainwright shares during that period. He told his broker that the purchase "kinda sounds crazy," given that Wainwright stock was rather illiquid, with an average daily trading volume of less than 2,000 shares. After the public announcement of the acquisition, the price of Wainwright's stock nearly doubled. Bray ultimately sold all of his shares for nearly $300,000 in illicit profits.

O’Neill pleaded guilty to a conspiracy charge and testified against Bray.  At trial, Bray admitted that he traded on material, nonpublic information about Wainwright, that O'Neill owed Eastern a duty of loyalty and confidentiality, and that O'Neill breached this duty by giving the Wainwright information to him. He argued, however, that the government presented insufficient evidence that O'Neill expected a personal benefit in exchange for the Wainwright tip, that he knew O'Neill anticipated such a benefit in exchange for the tip, or that he knew O'Neill had breached a fiduciary duty by giving him the tip. The jury found for the government, and upon conviction, the district judge sentenced Bray to 24 months in prison, followed by 36 months of supervised release, and imposed a $1 million fine.

The appellate court held that the evidence supported a finding by the jury that the two men had a close relationship, and that O’Neill disclosed the tip in expectation of a personal benefit. The fact that O’Neill surreptitiously gave Bray the tip after Bray requested a tip on which he could make a "big score" also indicated that Bray knew the tip was not legitimate. When O'Neill went to see Bray after learning of a FINRA inquiry, Bray did not act surprised when he "learned" that the tip stemmed from nonpublic information and did not ask why O'Neill had given him a tip in breach his duty of confidentiality. “Instead,” noted the court, “Bray's first instinct was to assure O'Neill that he had not told anyone about the tip and to develop a cover story.” The panel concluded that “[s]imply put, all of the evidence regarding the tip and its aftermath show that there was a sufficient basis from which a jury could reasonably conclude beyond a reasonable doubt that Bray knew O'Neill had anticipated a benefit and breached a fiduciary duty to his employer.”

In an unrelated case, the Justice Department obtained convictions against two other club members for a scheme involving the exchange of inside information on an energy technology company’s expected earnings, contracts and other major pending corporate developments. The First Circuit upheld both convictions in 2016.

The moral of the story is that you should think carefully before you act on a tip that you receive at Oakley Country Club. If the tip deals with anything other than the ball that you just shanked into the woods, do not play it as it lays.