On February 12, 2015, SEC Administrative Law Judge Jason Patil rejected the SEC’s argument in the insider trading case In the Matter of Bolan and Ruggieri that the misappropriation theory did not require proof of a benefit flowing to the original tipper. The respondents had moved for summary disposition of the case under the legal standard stated by the Second Circuit in United States v. Newman (see their Reply Brief on Impact of Newman Decision in In the Matter of Bolan and Ruggieri). The SEC argued that Newman’s analysis applied only to the “classical theory” of insider trading. ALJ Patil disagreed, in a brief ruling that can be read here: ALJ Ruling in In re Bolan and Ruggieri.
The ALJ stated the issue as follows: “whether, in an insider trading case brought under a misappropriation theory, the Division must establish that the tipper received a personal benefit for allegedly tipping material, non-public information.” Slip op. at 1. The ALJ rejected the SEC’s argument that the Newman court’s discussion of the personal benefit requirement was dicta. He noted that the Second Circuit previously ruled in SEC v. Obus, 693 F.3d 276, 284 (2d Cir. 2012), that although the “tipping liability doctrine” stated by the Supreme Court in Dirks v. SEC involved a case under the classical theory, “the same analysis governs in a misappropriation case.” As a result, when the Second Circuit “reconfirmed this principle” in Newman, “it was not mere dicta, but citing established law.” Slip op. at 2. He added: “Although the Division points to dicta from cases indicating that the personal benefit requirement is either not firmly established in misappropriation case-law or that it does not apply, no controlling authority has held as such. Moreover, such a proposition would conflict with controlling authority—Dirks and Obus.” Id.
On the issue of how the SEC could prove the required “personal benefit,” the ALJ said that proof of a close friendship between tipper and tippee “may be enough for a fact-finder to infer a personal benefit” (citing Obus, 693 F.3d at 291), but “such evidence, without more does not necessarily establish that the personal benefit element has been met.” Slip op. at 2 (emphasis added). His quote from the Newman opinion on the issue concluded with the Second Circuit’s focus on the need for proof of a personal benefit to establish “a fraudulent breach” by the tipper: “While our case law at times emphasizes language from Dirks indicating that the tipper’s gain need not be immediately pecuniary, it does not erode the fundamental insight that, in order to form the basis for a fraudulent breach, the personal benefit received in exchange for confidential information must be of some consequence.” Slip op. at 3 (quoting Newman, 773 F.3d 438, 452 (2d Cir. 2014) (emphasis in original).
ALJ Patil ordered that the SEC make a factual proffer stating in “sufficient detail” “the allegations on which it intends to base its personal benefit theory,” and “the evidence it has or expects to establish at a hearing on the personal benefit element,” and suggested that he might hold “an evidentiary hearing on the issue of personal benefit.”
February 14, 2015
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