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From Securities Regulation Daily, September 15, 2015

ALJ dismisses insider trading proceeding for failure to show ‘personal benefit’

By Amanda Maine, J.D.

An SEC administrative law judge (ALJ) found that a stock research analyst tipped a trader with material nonpublic information. However, because the SEC could not show that the analyst personally benefited from tipping the trader, the SEC failed to meet its burden for establishing the trader’s liability for insider trading (In the Matter of Gregory T. Bolan, Jr., Release No. ID-877, September 14, 2015, Patil, J.).

Background. The SEC instituted administrative proceedings against Gregory T. Bolan, Jr. and Joseph C. Ruggieri based on allegations made by the Enforcement Division implicating the two men in an insider trading scheme. Bolan was a research analyst in Wells Fargo’s Nashville research department and Ruggieri was a senior trader of health care stocks in Wells Fargo’s trading department in New York. According to the Division, Bolan tipped Ruggieri about Bolan’s changes to his ratings of six companies stock before his research reports were made public, and Ruggieri used that information to either purchase stocks prior to Bolan’s upgrades or sell short stocks prior to downgrades. The SEC alleged that Ruggieri’s insider trading generated over $117,000 in profits in his account at Wells Fargo. Bolan settled the proceeding against him in May 2015.

Constitutional issues. As a preliminary matter, ALJ Jason S. Patil rejected Ruggieri’s constitutional arguments for dismissal of the proceeding against him. Ruggieri’s argument that the proceeding violates the Appointments Clause because ALJs are “inferior officers” is more properly addressed to the Commission, which is not bound by Patil’s initial decision in the matter. Patil also advised that the Supreme Court’s Free Enterprise Fund decision does not support Ruggieri’s argument that ALJs have two layers of tenure protection in violation of the Constitution. In addition, Patil said that Ruggieri’s claims regarding violations of the delegation doctrine, his right to a jury trial, and that the proceeding is “inherently unfair” were also without merit.

Four stock trades were based on tips. Patil concluded that Ruggieri’s trades in four of the six stocks cited by the Division were based on advance knowledge of Bolan’s research reports. Ruggieri provided a contemporaneous thesis for each of his trading activities in the other two stocks. Ruggieri had shorted stock in Parexel International Corp. (PRXL) just prior to Bolan’s downgrading the stock in his research report. However, Patil found that the Ruggieri had presented sufficient evidence that demonstrated the desirability of holding a short position in PRXL even before the report was made public, including a negative “squawk” about PRXL, price movements of the stock, and Ruggieri’s communications with a client and a co-worker. Ruggieri also provided an independent thesis for buying shares of Covance Inc. (CVD) prior to Bolan’s upgrade of the stock, including a message to a client about buying CVD stock when its price reached the low $50s, Patil concluded.

However, the SEC had provided enough evidence to establish that that Ruggieri’s trades in the other four stocks were based on his knowledge of Bolan’s upgrades. These trades occurred following phone calls from Bolan and two of the stocks were also purchased by a close friend of Bolan’s, whom the Division also alleged was tipped by Bolan. The most plausible explanation for these trades, Patil concluded, is that Ruggieri traded on Bolan’s tips that he would be publishing reports upgrading these stocks.

Personal benefit. For insider trading cases against tippees like Ruggieri, the SEC must prove that the tipper (Bolan) breached a fiduciary duty by disclosing nonpublic material information to the tippee for a personal benefit. Patil cited the Second Circuit’s 2014 decision in U.S. v. Newman that courts cannot simply assume that a breach of fiduciary duty is for a personal benefit and that the benefit of a personal relationship must amount to more than the “ephemeral benefit” of friendship. The Division alleged that the benefits received by Bolan from tipping Ruggieri included career mentorship and positive feedback that would potentially increase Bolan’s annual bonus and improve his chances at promotion.

Career mentorship. Patil rejected the Division’s argument that Bolan benefited from Ruggieri’s career mentorship, noting that even the only witness put forward by the Division to support this claim explained that Ruggieri mentored Bolan because he was new to the business, and not because he did anything for Ruggieri. Patil also observed that other testimony revealed that Wells Fargo had a “mentoring attitude” with “opportunities for associates to be mentored” and that Ruggieri had also mentored another employee for non-nefarious reasons.

Positive feedback. Ruggieri had provided positive feedback on Bolan to the head of Wells Fargo’s institutional sales division in response to a request for feedback on analysts. Ruggieri said that “Bolan’s in a league of his own—great dialogue [with] clients and gets it.” If this positive feedback was objectively unreasonable, Patil wrote, it could be indirect evidence that Ruggieri provided this feedback in exchange for tips. However, Patil cited a number of other instances of glowing feedback about Bolan provided by other Wells Fargo employees, including that he was “the most trader friendly analyst,” a “cash cow for Wells Fargo,” a “rising star,” and had a “meteoric rise.” Rather than infer that Ruggieri provided positive feedback on Bolan in exchange for advance knowledge about his analyst ratings, it is just as likely that Ruggieri gave such feedback because it was genuine and that Bolan sought feedback as part of Wells Fargo’s standard procedures, Patil concluded.

Other alleged benefits.  Patil also rejected claims of other alleged benefits received by Bolan in exchange for tipping Ruggieri. The evidence supported the notion that, contrary to the Division’s argument that Bolan received the benefit of friendship, absent their shared professional experience, Bolan and Ruggieri were not close and communicated infrequently after they left Wells Fargo. The Division’s other arguments about the alleged personal benefits received by Bolan, including a close working relationship and a gift to a friend, were not supported by the evidence and were not part of the Commission’s Order Instituting Administrative Proceedings, Patil observed.  The Division also cited a number of compliance issues about Bolan that came under scrutiny during his time at Wells Fargo; however, Patil said that Bolan’s failure to follow Wells Fargo’s compliance policies when he violated these policies by providing Ruggieri with nonpublic information did not demonstrate that Bolan received a personal benefit.

As the Division could not establish that Bolan received a personal benefit by tipping Ruggieri, it did not meet its burden for showing liability for insider trading under the federal securities laws. The initial decision is not final, and either party can file a petition for review by the Commission.

The release is No. ID-877.

Attorneys: Alexander M. Vasilescu for the SEC. Silvia L. Serpe (Serpe Ryan LLP) for Joseph C. Ruggieri. Noam A. Kutler (K&L Gates LLP) Wells Fargo Securities, LLC.

Companies: Wells Fargo Securities, LLC

MainStory: TopStory FraudManipulation SECNewsSpeeches

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