The Newman effect has led to another dismissal, this time from the SEC’s own administrative court. On September 14, 2015, an administrative judge of the U.S. Securities and Exchange Commission (the “SEC”) dismissed an administrative proceeding related to allegations of insider trading. The insider trading allegations were made against a former Wells Fargo trader, Joseph Ruggieri. The proceeding was dismissed as against Ruggieri on the grounds that the SEC Division of Enforcement (“the Division”) failed to prove that the confidential information he received from a junior analyst at Wells Fargo, Gregory Bolan was exchanged for a personal benefit as required pursuant to the meaning of personal benefit established in Dirks v. SEC and United States v. Newman. Dirks and Newman confirm that to establish insider trading, the prosecution must prove beyond a reasonable doubt that the tipper breached a fiduciary duty by disclosing non-public material information to the tippee for a personal benefit.

The Division resolved administrative proceedings against the tipper, Bolan through an Offer of Settlement. Bolan was found liable for breaching section 17(a)(3) of the Securities Act of 1933, which prohibits, directly or indirectly, in the offer or sale of securities, engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. Bolan was ordered to pay an administrative penalty in the amount of $75,000.

Personal Benefit Through Positive Workplace Reviews, Mentorship and Friendship Not Proven

The Division alleged that Ruggieri, a former senior trader at Wells Fargo, traded based on material, confidential information he received from Bolan, a junior research analyst at Wells Fargo. Further, they alleged that Bolan exchanged this information for personal benefits in the form of career mentorship, positive feedback and maintaining and furthering his friendship with Ruggieri. Judge Patil held that Ruggieri did trade on material, confidential information in four of the six alleged instances, but the case was dismissed for failing to prove that Bolan exchanged the information for a personal benefit. The key evidentiary question was whether the prosecution had demonstrated a personal benefit through workplace reviews, mentorship and friendship.

Judge Patil found that the Division did not establish a connection between the tipping and Ruggieri’s positive reviews. Ruggieri’s reviews of Bolan were positive both before and after the tipping, Bolan’s reviews from other superiors were positive and Bolan already ranked so highly that it would be against his self-interest to risk tipping for a positive review. On these facts, Judge Patil found it was more likely that Ruggieri’s reviews were genuine, rather than received as part of an illicit agreement. Judge Patil was also not persuaded by the argument that Bolan received career mentoring in exchange for the information. In terms of their friendship, Judge Patil stated that Bolan and Ruggieri had an “amicable working relationship” but it was not found to be “a meaningful, close or personal one” despite the fact that they remained in touch after Ruggieri left his employment at Wells Fargo. Ultimately, Judge Patil found that the tips were more likely “incidental” to their friendship than part of quid pro quo arrangement.

In addition, the SEC Administrative Court considered Bolan’s longstanding history of disregarding compliance requirements as an explanation for the disclosure of information. Judge Patil mentioned that while it was possible Bolan tipped Ruggieri for a personal benefit, it seemed equally, if not more likely, that he “simply could not follow the rules and keep his mouth closed”.

The Evidentiary Requirement of Proving Personal Benefit in US Insider Trading Cases Continues to Raise Debate.

As stated by the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) in Newman, “while a personal benefit could be inferred from a personal relationship between a corporate insider and a tippee, the inference must be supported by evidence of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.” The Ruggieri decision provides an important example of the challenge faced by securities regulators who must meet the evidentiary standard articulated in Newman, often with only circumstantial evidence, and in circumstances where the personal benefit alleged is non-pecuniary.

As discussed recently on our blog, the United States Department of Justice is appealing the decision of the Second Circuit in Newman to the U.S. Supreme Court. A softening of the evidentiary requirements by the U.S. Supreme Court would be seen as a major victory for U.S. securities regulators, who have been impeded by Newman in their efforts to effectively prosecute insider trading cases involving tippers and tippees. If the U.S. Supreme Court does not soften the requirements we may continue to see insider trading cases being lost on the issue of the alleged personal benefit of the tipper. Canadian Securities Regulators will also be paying close attention to developments with Newman, as similar issues related to the use of circumstantial evidence have been central to recent insider trading decisions in Canada, such as the Alberta Court of Appeal decision in Walton, and the Ontario Securities Commission decisions in Agueci and more recently, Finkelstein.