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From Securities Regulation Daily, July 14, 2017

Split SEC decision results in dismissal of insider trading charges

By Brad Rosen, J.D.

SEC charges against former Wells Fargo trader Joseph Ruggieri for violating the antifraud provisions of the securities laws have been dismissed. An evenly divided commission, voting 1-1, was unable to determine whether Ruggieri traded while in possession of material nonpublic information between April 2010 and March 2011 as alleged in the order instituting proceedings (OIP). The proceedings were originally brought in September, 2014. Following a 12 day hearing, in December, 2015, an administrative law judge issued an initial decision dismissing the proceeding. The Division of Enforcement appealed with respect to only four of the six trades that were at issue in the OIP (In the Matter of Joseph C. RuggieriRelease No. 33-10389, July 13, 2017).

Alleged insider trading. Ruggieri was previously employed by Wells Fargo as a trader focusing on healthcare sector stocks. Ruggieri knew and worked closely with Gregory Bolan, a Wells Fargo analyst of those stocks. The Enforcement Division alleged that Bolan tipped Ruggieri shortly before Wells Fargo published research reports that Bolan wrote in which he changed his analyst ratings.

The Division asserted that Bolan tipped Ruggieri so that Ruggieri could take positions in the stocks and Wells Fargo could profit from anticipated price movements once the rating changes were published. At the hearing, the Division introduced evidence that Ruggieri took positions in these stocks and held them overnight, while the markets were closed, and before Wells Fargo published Bolan’s rating changes. Following publication, Ruggieri unwound the positions, generating a profit of approximately $75,000 for Wells Fargo.

Stein: evidence supports a finding of liability. Commissioner Stein found that there was sufficient evidence to establish that Ruggieri traded while he was aware of material nonpublic information on at least one occasion. She noted that the Division was not required to prove that Ruggieri engaged in insider trading on every possible occasion or on every type of potential material information. Commissioner Stein, in reviewing all of the circumstances related to the trades at issue, including what she described as "the uncanny timing of Ruggieri’s profitable trades," his trading history, the expert analysis, Ruggieri’s communications, and his explanations for the trades, concluded that the Division met its burden that Ruggieri traded while he was aware of material nonpublic information.

Piwowar: evidence was insufficient to establish a violation. Commissioner Piwowar pointed to a number of shortcomings in the Division’s case to support his conclusion that it had failed to establish that Ruggieri traded while aware of material nonpublic information.

First, Commissioner Piwowar noted that the telephone records were inconclusive. The Division argued that Bolan tipped Ruggieri during contemporaneous phone conversations. At the hearing the division introduced telephone records showing that calls were placed between a phone associated with Bolan and another associated with Ruggieri in the hours or days before publication of the relevant rating changes, and preceding the trades at issue.

While evidence of phone calls followed by trades may reasonably permit an inference that material nonpublic information was conveyed on the calls, such evidence does not necessarily compel that inference. The commissioner noted that Ruggieri and Bolan talked frequently and that Wells Fargo encouraged active communication between analysts and traders. Further, contemporaneous emails showed there were matters other than rating changes the two were discussing at the time. The commissioner also observed there was no actual proof that the two spoke during the calls reflected in the records and noted other personnel would typically answer Ruggieri’s phone when he was not at his desk.

Commissioner Piwowar also concluded that the statistical evidence introduced at the hearing was not conclusive. The Division relied on an expert and his statistical evidence to infer that Bolan tipped Ruggieri during phone conversations they had around the time of the four trades in question.

The expert opined that the trades held by Ruggieri in the days preceding Bolan’s rating changes would occur by coincidence about 8.78 percent of the time. In actuality Ruggieri traded ahead of Bolan’s rating 75 percent of the time, resulting in the expert’s conclusion that "the overnight positions in the stocks with ratings changes are not simply by chance."

Piwowar found this testimony lacking and noted that published research regarding earning changes and valuation had been excluded from the expert’s analysis. He pointed to the expert’s own testimony that if these changes had been included in the analysis, Ruggieri’s trading would be statistically indistinguishable from trading by coincidence, thereby undermining the claims Ruggieri had acted improperly.

Piwowar also found other evidence introduced by the Division as insufficient. For example, the Division attempted to show a former colleague of Bolan’s also traded ahead of two of the four rating changes at issue in this appeal, which suggested that Bolan also tipped him. This would be relevant because evidence that one person traded after being tipped may support an inference that another person who made similar trades was also tipped.

Commissioner Piwowar was unimpressed with this assertion, noting that the former colleague was never charged with insider trading, never testified or provided evidence against Bolan, and passed away prior to the institution of these proceedings.

Given the Commission’s evenly divided conclusions in this matter, in effect, the administrative law judge’s initial decision to dismiss the charges in this matter has been affirmed.

The release is No. 33-10389.

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