September 15, 2015
As I have long opined, I am no fan of insider trading cases -- but, as I have also consistently noted, I accept the fact that insider trading is a pernicious evil that saps the confidence of investors and undermines the credibility of the markets. How do I reconcile those positions? Frankly, not with ease but with resignation. I simply do not believe that federal prosecutors and Wall Street regulators will ever achieve meaningful success in pre-empting insider trading, and I see no proof that the ongoing criminal prosecutions and enforcement actions serve as deterrents. The limited manpower and financial resources of Wall Street's watchdogs should be better utilized in pursuing antifraud cases in which more vulnerable investors are typically victimized. In the end, it's about triage and allocating what you got towards helping those most in need. Consider the recent dismissal by an SEC ALJ of a high-profile insider trading case.
Case In Point
On September 29, 2014, the Securities and Exchange
Commission ("SEC") filed an Order Instituting Administrative and
Cease-And-Desist Proceedings (the "OIP") against respondents Gregory T. Bolan,
Jr. and Joseph C. Ruggieri. In the Matter of Gregory T. Bolan, Jr. and
Joseph C. Ruggieri, Respondents (OIP, '33 Act Rel. 9659; '34 Act Rel.
73244; Admin. Proc. File 3-16178 / September 29, 2014). The OIP alleged that Bolan, a Wells Fargo
Securities, LLC research analyst, had provided advance notice of ratings changes
to his "trusted friend and former colleague" Wells Fargo trader Ruggieri, who
then traded ahead of the release of those rating changes.
One Down And One to Go?
On May 28, 2015, Bolan
settled the charges against him and was found to have violated Section 17(a)(3)
of the Securities Act. As a consequence, Bolan was ordered to cease-and-desist
further violations of securities law and to pay a $75,000 civil penalty. In
the Matter of Gregory T. Bolan, Jr. and Joseph C. Ruggieri,
Respondents (Order Making Findings and Imposing Remedial Sanctions
And A Cease-And-Desist Order As To Gregory T. Bolan, Jr., '33 Act Rel. 99795;
'34 Act Rel. 75066; Admin. Proc. File 3-16178 / May 28, 2015).
The One To Go Didn't
On September 14, 2015,
SEC Administrative Law Judge Jason Patil (the "ALJ") issued his
50-page Initial Decision dismissing the unsettled charges against Respondent
Ruggieri. The ALJ found that although the SEC's Division of Enforcement had
established that Ruggieri traded on tips in four of six alleged instances, the
Division had failed to meet its burden of proof to establish that Bolan had tipped Ruggieri for a personal benefit within the meaning of Dirks v.
SEC, 463 U.S. 646 (1983), and United States v. Newman, 773 F.3d 438 (2d Cir.
2014). In the Matter of Gregory
T. Bolan, Jr. and Joseph C. Ruggieri, Respondents (Initial Decision
as to Respondent Bolan, Initial Dec. Rel 877; Admin. Proc. File 3-16178 / September 14,
As set forth in the
There is no dispute that Bolan's ratings changes
were material; ratings changes typically moved stock prices, and Ruggieri knew
this. Adm. FOF Nos. 102, 105-07, 114; Tr. 1201, 2046- 47. Bolan's ratings changes
had a statistically significant impact on the stock prices of the securities
being rated. Adm. FOF No. 115. Ruggieri paid attention to Bolan's ratings
changes and observed that Bolan's ratings changes typically, but not always,
moved stock prices. Tr. 2040-41. It is also undisputed that
unpublished research reports were confidential, nonpublic information. Adm. FOF
No. 136. Wells Fargo prohibited its research analysts from sharing forthcoming
research with the firm's traders, clients, or anyone else outside the research
department; the reports were to remain nonpublic until they were publicly
disseminated; and Bolan and Ruggieri knew this policy. Adm. FOF Nos. 136-40,
166-67. Further, Ruggieri knew that he was prohibited from trading based on
nonpublic information from a forthcoming research report. Adm. FOF Nos. 169-70.
The contested issues are whether Bolan tipped Ruggieri
and, if so, whether Bolan did so for a personal
benefitPage 9 of the OIP
The "Yes, But"
In considering the six trades at
issue, which the ALJ does in exhaustive and impressive fashion, he ultimately
came to the following conclusion that:
Given Ruggieri's credible explanations as to why he
traded in CVD and PRXL, I find that he did not trade based on any tips in those
two instances. His thesis as to those two trades outweighs the Division's
On the other hand, I find that
Ruggieri's trades in AMRI, EM, ATHN, and BRKR were based on Bolan's tips.
Ruggieri has no convincing explanation that would explain why he took positions
in those stocks, at exacting times, ahead of Bolan's reports and turned a
profit. As to these trades, the Division's claim of a tipping scheme is
corroborated by Moskowitz's parallel trading, as well as Ruggieri's trading in MDAS.
Page 28 of the
As such, the ALJ is left with the conclusion that in at least four of the six cited instances, Ruggieri's trades were based upon Bolan's tips. The question from that point on is whether those trades involved the so-called "personal benefit," as recently enunciated in the federal courts. In finding that no such personal benefit was proven by the Division, the ALJ explains that: The Division argues that "Ruggieri provided several
benefits to Bolan in exchange for the tips: career mentorship and positive
feedback that would potentially increase Bolan's annual bonus and improve
Bolan's chances of promotion." Div. Reply Br. at 18 (citing Div. Br. at 33-
36). The Division also argues that that Bolan tipped Ruggieri to maintain and
further their friendship. Div. Br. at 30-32; Div. Reply Br. at
17-18 Bolan had an amicable working relationship with
Ruggieri. Also, Ruggieri provided positive feedback about Bolan. However,
Ruggieri did so both before and after the tips. Bolan sought and received
feedback from various constituencies, both within and outside Wells Fargo, not
just from Ruggieri. Bolan's supervisor, Wickwire, rejected the notion that
Ruggieri provided feedback in exchange for tips. These facts undermine the
notion that Bolan sought or received feedback from Ruggieri in exchange for
tips. Although the tips and some of Ruggieri's feedback occurred within the
same year's timeframe, nothing otherwise suggests that Ruggieri's feedback was
in exchange for tips. It is more plausible that Ruggieri's feedback was
genuine, and that Bolan sought feedback as standard practice rather than for an
illicit benefit. Furthermore, the "friendship"
and working relationship between Bolan and Ruggieri was not a meaningful,
close, or personal one. Nor do the facts establish that Bolan had a quid pro
quo relationship with Ruggieri. The Division elected not to call
Bolan to testify and objected to the admission of Bolan's investigative
testimony, which I overruled. Tr. 1616-24. Although I had issued a subpoena ordering
Bolan's appearance as a witness, the Division revealed-to the surprise of
Ruggieri's counsel-that Bolan had returned to Nashville and objected to
testifying.21 Tr. 1616-19. Bolan would have been uniquely situated to offer
testimony on the issues, as I had expressed to the parties. Tr. 1341-42. Given
the lack of sufficient evidence on personal benefit, the Division's failure to
elicit Bolan's testimony further hindered its ability to meet its burden of
Page 35 - 36 of the
Bill Singer's Comment
Compliments to ALJ Patil for an exhaustive presentation of both facts and rationale in the Initial Decision. I commend the full-text document to all serious industry participants and investors.
As I noted after US v. Newman, if insider trading cases are not dead-on-arrival they are certainly on life support given the tests enunciated by the federal courts. Pointedly, the "personal benefit" standard is so nebulous and so susceptible to attack by defendants that criminal prosecutions and enforcement actions are no longer the fearsome prospects that they once were. Which is not to say that insider trading cannot be successfully prosecuted -- it can; but it is to say that the undertaking is far more difficult and far less likely to prevail.
For a detailed analysis of the
"personal benefit" standard as recently enunciated in US v. Newman,