Yesterday, the SEC announced the filing of an insider trading case against three Canadian citizens, Phillip Macdonald, Martin Gollan, and Michael Goodman, for alleged insider tipping and trading in the securities of several companies ahead of important public announcements. After careful consideration, I have determined that this case properly falls under Betrayal Level: Guarded (”Counseling Required”) on the Familial Betrayal Advisory System established here in December 2008.

The SEC alleges that between January and June 2005, Goodman's wife, who was an administrative assistant with Merrill Lynch Canada, learned the identities of a number of companies involved in confidential, upcoming business combinations. The SEC says that "when they were discussing what was happening at her job, Goodman's wife sometimes mentioned the information to Goodman, expecting that he would keep it confidential. Goodman instead misappropriated the information by disclosing it to his friend and business associate, Macdonald and to another business associate, Gollan." Macdonald allegedly made over $900,000 in ill-gotten gains, and Gollan allegedly made over $90,000 in ill-gotten gains.

Based on past precedent, this Goodman case seems to fall somewhere between Betrayal Level: Guarded ("Counseling Required") and Betrayal Level: Elevated (”Clothes Thrown Out Window”). I am keeping Goodman at the lower "Guarded" status, however, for two main reasons.

First, it seems to be most similar to SEC v. Rocklage, a case previously placed in the Guarded level. To recap, in Rocklage, the SEC sued Patricia Rocklage (the wife of the CEO of Cubist Pharmaceuticals), her brother, and others for insider trading in Cubist securities. According to the SEC, on December 31, 2001, Rocklage's husband informed her of the negative results of a clinical trial involving one of Cubist's most important products, Cidecin. However, unbeknownst to her husband, Ms. Rocklage had a "pre-existing understanding with her brother whereby she would give him a ‘wink and a nod'" if she ever became aware of any bad news about Cubist that might affect its stock price. Ms. Rocklage told her husband that she intended to signal her brother to sell his Cubist stock, and her husband urged her not to do so. The SEC alleged that "notwithstanding her husband's entreaties, by no later than the morning of January 2, 2002, Ms. Rocklage provided ‘a wink and a nod'" to her brother, who promptly sold all of his 5,583 shares, avoiding a loss of nearly $100,000 when Cubist stock plummeted. Thus, Rocklage even had an express "urging" by the betrayed spouse not to trade on the nonpublic information, an important fact not present in the Goodman case.

Second, it just does not seem to reach the level of outrage required under our precedents for Betrayal Level: Elevated (”Clothes Thrown Out Window”). In the Elevated case of SEC v. Edelman, for example, the SEC sued Lee Edelman for insider trading in the securities of Metron Technologies shortly before the August 2004 announcement that it was being acquired by Applied Materials. According to the SEC, Edelman learned about the acquisition negotiations while living with his girlfriend, an associate at a prominent New York law firm retained by Applied Materials. Edelman saw his attorney girlfriend working in their apartment, reviewing deal documents and discussing the transaction on the phone with colleagues, and used this information to secretly begin acquiring Metron shares.

The SEC alleged that even after Edelman’s girlfriend later cautioned him that he could not use the information for any purpose (to which he supposedly agreed), Edelman continued acquiring Metron shares, ultimately making profits of $23,000. As a final kicker, it was later reported that a few weeks after he betrayed his girlfriend, Edelman also broke up with her.

The combination of the "cautioning," the agreement not to trade, and, of course, the break-up would seem to keep the Edelman case one level above the Goodman case. Thus, Goodman should remain at the Guarded level. Agree?