An SEC administrative law judge (“ALJ”) found that former Wells Fargo trader Joseph Ruggieri traded on material nonpublic information tipped him by former analyst Greg Bolan, but dismissed the insider-trading charges against Ruggieri, because the Division of Enforcement did not prove personal benefit to his tipper.
The bottom line: It doesn’t violate anti-fraud rules to trade on material non-public information obtained from a casual acquaintance who “simply could not follow the rules and keep his mouth closed,” where there is no clearly-demonstrable personal benefit to the tipper. Trade on gratuitous inside information.
“[I]nsider trading constitutes fraud within the meaning of these provisions when it involves a market participant’s breach of a fiduciary duty owed to a principal for a personal benefit. See United States v. O’Hagan, 521 U.S. 642, 652-53 (1997);Dirks, 463 U.S. at 663; Newman, 773 F.3d at 446.” Op. at 8.
“To establish Ruggieri’s liability, the Division must therefore show that: 1) Bolan tipped material non-public information to Ruggieri in breach of a fiduciary duty owed to Wells Fargo for a personal benefit to himself; 2) Ruggieri knew or had reason to know of Bolan’s breach, that is, he knew the information was confidential and divulged for a personal benefit; and 3) Ruggieri still used that information by trading or by tipping for his own benefit. See Newman, 773 F.3d at 450; SEC v. Obus, 693 F.3d 276, 286-87, 289 (2d Cir. 2012).” Op. at 8
The only contested issues were whether Bolan tipped Ruggieri and whether he did so for personal benefit. The Division could not prove two among six alleged tips, because circumstantial evidence of communications between Bolan and Ruggieri was outweighed by Ruggieri’s credible, coherent, independent, reasons for taking the trading position, apart from Bolan’s research. The ALJ found that Ruggieri traded on four of Bolan’s tips as to material nonpublic information (here, Bolan’s unpublished research reports).
The Division argued that it need not prove personal benefit at all in misappropriation cases, but the ALJ rejected that position as over-reaching legal precedent. Op. at 31-32. Insider trading does not police all trading, or all confidential information, or demand information equality. Rather insider trading is a sort of corruption in which personal gain taints the passage of information and, undisclosed, involves manipulation or deception. “Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach.” Dirks, 463 U.S. at 662. See Op. at 29-32.
On the evidence, the ALJ found:
- The tippee’s general mentorship of young analysts, including tipper, Op. at 36;
- A friendly working relationship, but “not a meaningful, close, or personal one,” Op. at 35; and,
- Positive feedback, consistent with other reviewers, unremarkable and inconsequential, Op. at 36-43;
were not enough to carry the Enforcement Division’s burden of proof. Although it was possible the tips were a gift, it was just as likely that the analyst “simply could not follow the rules and keep his mouth closed.”
ALJ Patil previously expressed doubt about the Division’s case when deciding to apply Newman. See Gregory T. Bolan, Jr., Admin. Proc. Rulings Release Nos. 2350, 2015 SEC LEXIS 703 (Feb. 25, 2015); 2309, 2015 SEC LEXIS 523 (Feb. 12, 2015).
Patil’s decision is significant – not just because it applies Newman, but because he held Newman was consistent with prior Supreme Court precedent in Dirks andO’Hagan, thus undercutting the government’s position seeking Supreme Court review of Newman.
Ruggieri also raised, and ALJ denied, arguments attacking the SEC’s administrative forum, including (1) due process, (2) Appointments Clause, (3) tenure protections violating Free Enterprise Fund, (4) delegation, and (5) Seventh Amendment. Bolan previously settled the charges against him.
The decision is Gregory T. Bolan, Jr., Initial Decision Rel. No. 877 (Sept. 14, 2015) (AP File No. 3-16747), here.