SEC Tests Bounds of Newman in Internal Insider Appeal

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By Rob Tricchinelli

Feb. 1 — Stung by a loss in the SEC's in-house forum, the agency's Enforcement Division is pressing its case internally that an influential Second Circuit decision doesn't wipe out its insider trading case against a former Wells Fargo trader (In re Bolan, SEC, Admin. Proc. File No. 3-11678, brief on review of initial decision, 1/11/16).

The Securities and Exchange Commission is grappling with the consequences of United States v. Newman as it fights to preserve its administrative case against trader Joseph Ruggieri, according to a document obtained by Bloomberg BNA.

The Enforcement Division alleged that Ruggieri traded on tips from a Wells Fargo coworker, but an administrative law judge dismissed the in-house action . The agency's enforcement staff is now appealing to the commission.

‘Valuable Inside Information.'

ALJ Jason Patil held that the Enforcement Division didn't prove, under the U.S. Court of Appeals for the Second Circuit's decision in Newman, that analyst Gregory Bolan Jr., who allegedly tipped Ruggieri, received a personal benefit for passing along the inside information.

The Enforcement Division fired back in an internal appeal to the commission, arguing that the relationship between the two men was close enough to satisfy Newman because of the strong implication of a personal benefit.

“Registered representatives in the securities industry should not be insulated from civil liability for giving valuable inside information—on which they cannot themselves trade—to their close colleagues and mentors to trade on instead,” the division argued on appeal to the commission in a Jan. 11 filing not yet made public but obtained by Bloomberg BNA.

The SEC is facing fallout from the Newman decision in federal courts, as several high-profile insider trading cases have been dismissed and previous settlements vacated. The U.S. Supreme Court has agreed to take up an insider trading case with similar facts out of the Ninth Circuit .

The Ruggieri matter shows the difficulties facing the SEC in navigating the post-Newman landscape, even in its own administrative forum.

Satisfying Newman?

Bolan and Ruggieri had a close enough relationship to meet the standard in Newman, the Enforcement Division argued.

“A ‘meaningfully close personal relationship,' standing alone, satisfies Newman,” it said.

In that case, the Second Circuit ruled that a personal relationship can't be inferred unless there is proof of a relationship with “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”

Bolan and Ruggieri were friends with a close working relationship, the brief said. Ruggieri mentored Bolan, Bolan's supervisor valued Ruggieri's comments, and Ruggieri's input on Bolan affected his career prospects, all of which the division said proves that Bolan benefited by giving tips.

“Applying Newman for the first time in an administrative proceeding, the Initial Decision nevertheless rejects the largely undisputed, objective evidence of the personal benefits Bolan expected or received from Ruggieri,” the division argued.

The SEC filed its brief Jan. 11 but the agency hasn't yet posted the document to its website. An SEC spokeswoman told Bloomberg BNA that there was no timetable for when the agency would release the filing.

‘Keep His Mouth Closed.'

The division alleged that Bolan tipped Ruggieri to impending changes in buy/sell ratings that the company issued on certain stocks, and that Ruggieri earned more than $100,000 in illicit profits by trading on the information.

In dismissing the case, Patil wrote that instead of Bolan tipping for a personal benefit, it was just as plausible that he “simply could not follow the rules and keep his mouth closed.”

On appeal, the enforcement division argued that this conclusion “implausibly speculates” on Bolan's justification for tipping.

“Rather, Bolan tipped Ruggieri for the only plausible reason an analyst would repeatedly risk his career to tip a powerful mentor: to benefit himself,” it argued.

Settlement

Bolan previously settled related SEC allegations.

Ruggieri's filling is due Feb. 10.

He is represented by Serpe Ryan LLP in New York.

By Rob Tricchinelli

To contact the reporter on this story: Rob Tricchinelli in Washington at rtricchinelli@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com