The SEC has brought insider trading cases that center on information exchanged on the golf course. Feds hunt fraud at the golf course

When you dish out illegal stock tips at the golf course, there are no mulligans.

This summer the Securities and Exchange Commission has brought insider trading cases that center on the relationships between golfing buddies and how their chitchat in the tee box or at the 19th hole turned into lucrative and illegal trading bonanzas.


In July and August, the SEC filed two separate charges involving golf connections, including one targeting seven friends who regularly hit the links at Oakley Country Club just outside of Boston. The SEC charged they made more than $554,000 through illegal trades involving information shared about American Superconductor Corporation.

This follows a similar case from last year where the agency charged an accountant at Big Four firm KPMG with giving stock tips to his golfing partner.

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Duffers are on notice — the lush fairways, manicured greens and posh clubhouses of America’s country clubs are no sanctuary from the SEC’s pursuit of fraudsters.

“Given the SEC’s success in finding insider trading cases in the golf world, that will give them incentive to continue pursuing investigations that involve golfers,” said Robert Heim, a former enforcement attorney and assistant regional director at the SEC in New York. “I do anticipate in the next year or so we may see more cases involving golfers.”

Many insider trading cases, which the SEC often struggles to win, get stronger when the agency has evidence of a relationship between someone who had insider knowledge and the person who made profitable trades with that information.

Put those two people in the same tee box and investigators are well on their way to bringing charges.

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It also highlights how the culture of the sport, which caters to a wealthier professional class and provides plenty of downtime for idle chatter and shop talk, makes it a target for investigators.

“There are two things you do on the golf course: You quote Caddyshack and you tip inside information,” said Peter Henning, a former SEC attorney, referring to the 1980 movie.

Some veteran financiers who like to hit the links said they would be surprised if the SEC was able to bring multi-million dollar cases by focusing on golf, arguing it is likely to catch only smaller fish.

“Insider information on the golf course is [the] Hunger Games in my view,” said John Spooner, a lifelong golfer and money manager for a bank in the Boston area, referring to the teenage survivalist books. “It is people who are not high up the food chain in business or they need to make a score.”

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Given the SEC’s tools to monitor trades that would trigger an insider trading investigation, it is increasingly difficult to get away with the crime, he said.

“Honestly, I think people who would do it these days are really stupid or don’t have much net worth of their own,” said Spooner, who is now in his seventies and started as a golf caddie at 11 years old.

Nonetheless, the recent cases illustrate how the SEC can use golf connections to target stock fraud.

In the July case, the SEC filed insider trading charges against the seven golf buddies, led by a semi-professional Eric McPhail, 41, of Waltham, Mass.

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A member of Oakley Country Club in Watertown, McPhail obtained valuable information from a fellow club member who was an executive at American Superconductor Corporation (AMSC), the SEC said in court documents.

Beginning in July 2009, McPhail obtained insider information about AMSC during golf outings and then shared those details with his golfing friends, the SEC said. Trading on these tips before the AMSC news was publicly announced, McPhail’s friends booked thousands of dollars in profits, according to the court documents.

“Nice profitable day for the boys,” McPhail wrote in a July 2009 email to his golfing friends after they made between $2,000 and $11,000 individually from his insider information, the SEC said. “So when should I report in on which restaurant and massage parlor I want to be treated to?”

These emails showed that for two years the golf friends discussed when to buy and sell AMSC, as well as who among them would attend McPhail’s annual trip to the Kentucky Derby.

Four of the defendants have already settled with the SEC and agreed to pay thousands of dollars in penalties.

McPhail and co-defendant Douglas Parigian of Lowell, Mass., were indicted by a Massachusetts grand jury for fraud and other violations.

Lawyers for McPhail and Parigian could not be reached for comment. Attempts to reach McPhail were unsuccessful. If found guilty, the men could face up to 20 years in prison.

Oakley was not mentioned in the court documents, but information available online shows McPhail’s membership and history of playing at the club. Representatives at the Oakley Country Club, which is about two miles from Cambridge, did not respond to requests for comment.

The SEC’s latest charges filed on Aug. 18, also in a Massachusetts district court, alleged a bank executive, Patrick O’Neill, told his golfing friend and fellow country club member, Robert Bray, about a pending acquisition that would benefit the bank’s share price.

Bray, 76, reaped almost $300,000 in profits based on trades he made after getting insider information from 64-year-old O’Neill, the SEC said in court filings.

A lawyer for O’Neill declined to comment. Bray’s lawyers could not be reached for comment. An SEC spokesman declined to comment.

Insider trading is a nebulous crime to nail down.

Unlike Ponzi schemes, where victims are obvious, insider trading crimes inflict pain on the investing public at large. It is chiefly an issue of fairness — the criminals cheat the public by trading on insider knowledge that is guaranteed to generate a profit.

To catch insider trading, the SEC monitors for any unusual spikes in buying or selling around the time of a big swing in a stock price. Then, the SEC goes looking to see who made those trades. If investigators cannot prove the individual made his or her trades with insider information, the case goes cold.

To connect the dots of insider trading, the SEC will go to people at the company at issue and ask them about their social life, Henning said. The investigators ask about the insiders’ hobbies, hoping to find any overlap with the individual who made unusual trades.

While it is unclear exactly how the SEC discovered the relationships in the two recent cases, the agency’s court filings document years of golf games between the tipsters and traders.

“The golf cases are always tipping cases, I tell you and then you go trade,” said Henning, now a professor at Wayne State University Law School. “In those cases, to prove a violation, you have to show there was a benefit that flowed between the tipper and tipee.”

Last year, a similar insider-trading case involved an accountant at KPMG who gave stock tips to his close friend and golfing partner. The KPMG accountant, Scott London, helped his friend Bryan Shaw make more than $1.2 million in illegal trading ahead of corporate earnings and merger announcements, the SEC alleged.

London pleaded guilty to insider trading and was sentenced in April to 14 months in jail.

Without a strong relationship link between individuals, insider trading cases are harder to prove, lawyers said. The SEC filed 44 insider trading enforcement actions in fiscal year 2013, and that might be too many considering how much time and energy it takes investigators to pursue each case, some critics said.

Since scoring a record $92.8 million penalty from billionaire hedge fund manager Raj Rajaratnam in 2011, the SEC has lost some high-profile insider trading cases, including last year’s jury verdict in favor of Mark Cuban, owner of the Dallas Mavericks basketball team.

“Comparing the relative harm of insider trading to other violations that affect thousands and thousands of investors directly, there is an argument that the SEC’s resources could be shifted away from insider trading,” said Daniel Nathan, a former attorney for the SEC’s enforcement division. “There is a lot of it happening that is not detected.”

Regardless, golfers may want to keep their conversations focused on how to cut down on their slice, and keep their stock tips to themselves.

“Golf is becoming a recurring theme in insider trading cases,” said Thomas Gorman, a former official in the SEC’s enforcement division.