Last week, U.S. regulators charged a former Wells Fargo equity analyst and a trader with insider trading, saying the analyst tipped the trader about upcoming ratings changes for six healthcare stocks.
Background of Case
The Securities and Exchange Commission alleges that between April 2010 and March 2011, former Wells Fargo healthcare analyst, Gregory Bolan Jr., tipped ex-Wells Fargo trader, Joseph Ruggieri, about research ratings changes he was about to release on eight healthcare stocks. The SEC charges that Ruggieri traded on six of these tips, reaping $117,000 in profits.
The SEC said that Bolan also tipped another friend about these ratings changes, enabling him to earn $10,000 in profits. This friend has since died.
The stock tips that Ruggieri purportedly traded on were about Albany Molecular Research Inc., AthenaHealth Inc., Bruker Corp., Covance Inc., Emdeon Inc. (now part of Blackstone), and Parexel International Corp.
Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office explained the charges, “Instead of abiding by firm policies that specifically prohibited trading ahead of published research, Ruggieri used information obtained from Bolan to make profitable trades in advance of six separate research reports. The repeated nature of these violations demonstrates an utter disregard for our insider trading laws.”
The SEC says that Bolan is now working for Sterne Agee Group in Nashville, Tennessee, while Ruggieri is employed by ISI Group out of Raleigh, North Carolina.
Wells Fargo itself was not charged in this case as the bank purportedly provided compliance training to both its research analysts and its traders that this type of pre-release communication was strictly prohibited.
The case is being brought in the SEC’s administrative court (administrative proceeding number 3-16178). The administrative proceeding will determine what, if any penalties and relief will be sought against Bolan and Ruggieri, including disgorgement of ill-gotten gains, prejudgment interest, financial penalties and other remedial measures.
Challenge to SEC Case
Sam Lieberman, of Sadis & Goldberg LLP, the defendants’ lawyer said Bolan and Ruggieri “vehemently deny” the charges and that the SEC’s decision to bring the case as an administrative proceeding instead of in federal court raises questions about its case.
Lieberman explained “Mr. Ruggieri did not receive a profit of $117,000 from the alleged trading … the trades took place in a Wells Fargo proprietary account in which he only received 6 percent of profits. That is just the tip of the iceberg regarding the defects in the SEC’s case.”
Integrity’s Take on the Case
It is clear to us that Bolan’s alleged tipping Ruggieri about pending research ratings changes probably broke Wells Fargo’s own compliance polices about this type of communication (the reason Wells Fargo provided compliance training to their staff on this topic). However, this type of early dissemination of research ratings has unfortunately been going on on Wall Street for some time.
This case has some similarities to the 2012 New York Times story where Lehman Brothers analyst Ted Parmigiani, recounted an instance where he disclosed to other Lehman employees via an internal “squawk box” that he planned to publish a market-moving report on the shares of Amkor Technology within the hour. However, by the time his report was published the stock had already moved, purportedly because Lehman employees had leaked the news to their clients. The SEC investigated the case, but never brought charges.
Another relevant case was the Goldman Sachs “trading huddle case”. The SEC stated that between January 2007 and August 2009 there were hundreds of instances when a ratings change occurred within five business days after the stock was discussed at a “trading huddle” or referenced in huddle-related documents. The SEC cited specific instances when publishing analysts recommended stocks during huddles after having drafted reports upgrading the stock from Neutral to Buy, or after having proposed downgrades to stocks to research management. In April 2012, Goldman eventually paid a $22 mln fine to settle this matter of selective dissemination.
However, the key issue in the Bolan / Ruggieri case is whether this could be deemed to be insider trading. Traditionally, in order for a case to be considered insider trading, the person disclosing the non-public information, known as the tipper, must do so in violation of a fiduciary duty. In other words, someone who receives material nonpublic information could trade on it unless the person who provided them the information had a fiduciary duty to keep it confidential. Historically, the Supreme Court has explained that proof that a fiduciary duty was breached is “whether the insider personally will benefit, directly or indirectly, from his disclosure”.
Bolan, a Wells Fargo research analyst who clearly was not an insider (at least in the traditional sense) and who lacked any fiduciary duty to keep his research information confidential, allegedly provided that information to Ruggieri, a Wells Fargo trader, who then used that information to enrich Wells Fargo’s account and ultimately, himself. The issue that the SEC will need to prove in this case is whether Bolan received any special benefit from Ruggieri or the other unnamed recipient of his tips, to entice him to release the pending ratings changes to them early.
In our minds, the mere fact that the SEC is trying to bring this case against Bolan and Ruggieri as “insider trading” is interesting as it makes us wonder whether the SEC is using this as a trial balloon to see how their arguments are received by the administrative court. If the administrative court sides with the SEC, we would not be surprised to see them bring other similar cases against clients or bank employees who benefited from the receipt of “material non-public research information”.