The Commission affirmed by a divided vote an Initial Decision dismissing insider trading charges against Wells Fargo trader Joseph Ruggieri. At a hearing the Division of Enforcement failed to prove that in six instances Mr. Ruggieri traded ahead of announcements by a Wells Fargo analyst. The Initial Decision concluded that the pattern of phone calls and trades relied on by the Division of Enforcement was not sufficient to establish the charges when placed in context, even along with other evidence offered. The Commission affirmed by a divided vote with one Commissioner voting to overturn the findings of the ALJ and one voting to sustain the dismissal.
SEC Enforcement – Litigated Actions
Insider trading: In the Matter of Joseph C. Ruggieri, Adm. Proc. File No. 3-16178 (July 13, 2017). The action initially involved two Wells Fargo employees, Gregory Bolan who settled and Joseph Ruggieri. Mr. Bolan was a research analyst in Nashville, Tennessee focused on three sub-sectors of the health care industry. Mr. Ruggieri was a senior trader of health care stocks in New York City, trading for customers and the firm. The Order Instituting Proceedings alleged that over a two year period beginning in 2010 Mr. Ruggieri traded ahead of six recommendations made by Mr. Bolan. This generated over $117,000 in profits in Mr. Ruggieri’s account. Following a hearing on the merits the ALJ found in favor of Respondent. The staff appealed four of the six instances of alleged insider trading. The Commission affirmed based on a split between the two commissioners. Commissioner Stein would have affirmed as she stated in a brief, one paragraph opinion. Commissioner Piwowar would have affirmed based on the analysis in his opinion. A detailed analysis of the case, including the Initial Decision and the opinion issued by the Commissioners is here.
SEC Enforcement – Filed and Settled Actions
Statistics: Last week the SEC did not file a civil injunctive case but did institute 2 administrative proceedings, excluding 12j and tag-along proceedings.
False disclosure: In the Matter of David Lubin, Adm. No. 3-18070 (July 19, 2017) is an action that names as a Respondent, New York attorney David Lubin who also served as secretary to Entertainment Art, Inc., a public company, from 2007 through mid-2011. Mr. Lubin, along with two others, arranged the sale of about 1.2 million shares of the firm. There were also about 610,000 shares sold in private placement. Mr. Lubin, who prepared firm filings, repeatedly failed to include these facts in the filings, creating the appearance that there were about 1.8 million issued shares available. Ultimately about 14 million shares were sold in an illegal distribution which is the subject of another Commission action. The Order alleges violations of Exchange Act Section 10(b). Mr. Lubin partially resolved the matter, consenting to the entry of a cease and desist order based on the Section cited in the Order. He also agreed to the entry of an order prohibiting him from serving as an officer or director of a public company and denying him the privilege of appearing and practicing before the Commission. The question of monetary sanctions will be considered at a later date.
Valuation: In the Matter of Envisco Capital LLC, Adm. Proc. File No. 3-18071 (July 19, 2017) is a proceeding which names as Respondents the firm, formerly a registered investment adviser, Ray Bowers, a Managing Principal and CCO and Jeffrey LaBerge CPA, a Principal. During the period 2012 to 2014 the adviser failed to properly value the primary asset of one private fund by utilizing unreasonable assumptions regarding revenue projections. The adviser also failed to properly value a loan held by another fund. In addition, the adviser made misrepresentations regarding one fund. Mr. LaBerge had a primary role in the improper valuations which were approved by the other Respondents. The Order alleges violations of Advisers Act Sections 206(2), 206(4) and 207. Respondents resolved the proceedings, consenting to the entry of cease and desist orders based on the Sections cited in the Order except the order as to Mr. Bowers does not include Section 207. The firm was censured. An association bar as to the securities business was imposed on each individual Respondent with the right to apply for reinstatement after two years. Respondents will each pay a penalty of $50,000.
Offering fraud: SEC v. TelexFree, Inc., Civil Action No. 14-cv-11858 (D. Mass.) is a previously filed action centered on a pyramid scheme that targeted the Latino community. Defendant Steven Labriola, the international sales director for the firm, settled with the Commission. Mr. Labriola made certain admissions in connection with the settlement and consented to the entry of a conduct based injunction prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). He will also pay about $25,000 in disgorgement and prejudgment interest. Two other defendants in the Commission’s action have been criminally charged, one of whom fled. The SEC’s action continues as to the other defendants. See Lit. Rel. No. 23880 (July 14, 2017).
Court of Appeals
MSRB Rules: Tennessee Republican Party v. SEC, Nos. 16-3360/3732 (6th Cir. July 13, 2017) is an action brought by the Tennessee Republican Party and the New York Republican State Committee challenging certain rule amendments proposed by the MSRB which were deemed approved by the SEC. Specifically, the amendments limit the campaign activities of persons who advise city and state governments on issuing municipal securities. The court concluded that Petitioners lacked standing and thus dismissed the petitions for a lack of jurisdiction. The SEC’s motion to dismiss was denied as moot as was the petition by the MSRB to intervene.
Misuse of client funds: The Securities and Investment Commission permanently banned Gold Coast based financial adviser Satvir Singh Birk form the industry. The ban follows findings that the former adviser drew checks on client accounts without authorization deceived some client regarding funds withdrawn from their accounts, mislead others regarding the use of their proceeds and with regard to their investments. Parallel criminal charges are pending.
MOU: The Securities and Futures Commission entered into a memorandum of understading with the U.K. Financial Conduct Authority. It provides for consultation, cooperation and an exchange of information in connection with their respective duties.
Report: The Financial Conduct Authority published its monthly round-up – a news letter for recounting important events over the last month (here).
Failure to supervise: The FCA fined David Watters £75,000 (U.S.$98,000) for failing to properly supervise in his role as a compliance officer at two different firms. Specifically, the regulator concluded that Mr. Watters did not give sufficient consideration to whether the advice process was compliance, take reasonable steps to gain a sufficient understanding of the relevant regulatory requirements, failed to obtain the appropriate third party reviews and did not take reasonable steps to ensure that advisers were properly monitored to reduce the risk of unsuitable pension transfer advice being given to clients.