SEC Insider Trading Cases as Administrative Proceedings – A New Trend?

Traditionally, the SEC has brought insider trading cases as civil injunctive actions. The recent emphasis on administrative proceedings, however, appears to be changing that. Earlier this week the agency brought an insider trading cases as an administrative proceeding against a Wells Fargo Analyst and Trader, In the Matter of George T. Bolan, Jr., Adm. Proc. File No. 3-16178 (September 29, 2014). Last week the SEC brought an insider trading case against an associate of an unregistered investment adviser, In the Matter of Richard O’Leary, Adm. Proc. File No. 3-16166 (September 25, 2014). Yesterday, the Commission added to the growing list, filing two related proceedings against a friend of a hedge fund Analyst and his tippee. In the Matter of Filip Szymik, Adm. Proc. File No. 3-16183 (September 30, 2014); In the Matter of Jordan Peixoto, Adm. Proc. File No. 3-16184 (September 30, 2014).

Filip Szymik is employed as a consultant in New York City. His roommate and friend is an Analyst at Pershing Square Management, L.P, a hedge fund lead by well-known activist investor William Ackman. The analyst began working at Pershing Square as an intern. Later he became a full time employee. In that capacity he acknowledged in writing the compliance procedures of the firm which directed that he not disclose inside information.

Beginning in September 2012 he was part of an investment team assigned to research Herbalife. Though that position he learned that Pershing had concluded the company was an illegal pyramid scheme. He also knew that the firm intended to disclose its conclusion at a conference on December 20, 2012.

While the Analyst worked on the Herbalife team, and before, he was roommates with his childhood friend, Filip Szymik. Both grew up in Poland. The Analyst has instructed his roommate that the work at Pershing is highly confidential and could not be disclosed or used to trade securities.

Prior to December 19, 2012 the Analyst disclosed to his friend and roommate that he was working on Herbalife. He also told Mr. Szymik that the firm had a negative view which would be disclosed on December 20.

One of Mr. Szymik’s close friends is Jordan Peixoto, a research analyst at Deloitte. Although he lives in Toronto, during December 2012 he was working in New York City. The two men spent nearly every weekend together.

Prior to December 19, 2012 Mr. Szymik told his friend about Herbalife, the position of Pershing Square and the pending presentation. Mr. Peixoto knew that his friend’s roommate was an analyst at Pershing Square and that the work was confidential. Nevertheless, just before 2:00 p.m. on December 19, 2012 he purchased Herbalife options. Shortly after those purchases, CNBC reported that Pershing had acquire a significant short position in Herbalife and was making a presentation the next day.

Following the CNBC report, and the Pershing presentation on December 20, 2012, Herbalife stock declined by 39%. By the close of the market on December 21 Mr. Peixoto’s options had increased in value to about $339,421. He asked his brokers to let them expire worthless. One refused, giving him a profit of $47,100.

Each Order alleges violations of Exchange Act Section 10(b). Mr. Szymik settled with the Commission, consenting to the entry of a cease and desist order based on the Section cited in the Order. He also agreed to pay a civil penalty of $47,100. Mr. Peizoto did not resolve his action. It will be set for hearing.

SEC Charges Wells Fargo Analyst, Trader With Insider Trading

Analysts reports frequently move the market and are thus considered inside information prior to publication. That is the predicate for an SEC administrative proceeding which charges a Wells Fargo analyst and trader with insider trading. In the Matter of George T. Bolan, Jr., Adm. Proc. File No. 3-16178 (September 29, 2014).

George Bolan was a research analyst in the Wells Fargo research department in Nashville, Tennessee. He was also a registered representative. His research focused on the health care industry: contract research organizations, health care information technology and life science tools.

Respondent Joseph Ruggieri was a senior trader of health care stocks in Wells Fargo’s trading department in New York from August 2009 to April 2011. He was also a registered representative, executing customer transactions and placing principal trades on behalf of Wells Fargo. He was paid 6% of the monthly net profit and loss in his firm trading account. He also received a salary and 5% of the commissions he generated on a monthly basis.

Messrs. Bolan and Ruggieri are friends. At one point Mr. Ruggieri and his manager at Wells Fargo provided positive feedback to Mr. Bolan’s managers at the firm which helped him obtain a promotion.

Mr. Bolan was a well-respected analyst in the areas he covered. Institutional Investor publications named him “Best up and Comer” in 2010. The department viewed him as a rising star. He also understood that the impact of his ratings and that they moved markets. In an e-mail exchange between the two men Mr. Ruggieri noted in referencing one of Mr. Bolan’s research notes that “’[s]till moving stock.”

Between April 2010 and March 2011 Mr. Bohan published eight ratings changes or initiations of coverage with an outperform or underperform rating. Mr. Ruggieri traded in advance of six of them, according to the Order. In each instance the Order alleges that the Mr. Bohan after completing his assessment of the firm, and before the publication of the report, “communicated, in words or substance, material nonpublic information . . .” to Mr. Ruggieri. In some instances the Order alleges that after Mr. Bohan’s supervisor signed off on the report there was a phone call between the two men. In each instance Mr. Ruggieri traded in advance of the public distribution of the report.

Following the publication of the six reports the volume and/or the stock price increased or decreased, depending on the rating. Overall Mr. Ruggieri had over $117,00 in trading profits. Mr. Bolan is alleged to have benefited from the illegal tipping because of the friendship between the two men and from the recommendation that assisted him in obtaining a promotion.

The Order also alleges that Mr. Bolan tipped Trader A in one instance in May 2010 who traded profitably. Trader A was a friend of Mr. Bolan’s who has since passed away.

Wells Fargo compliance procedures prohibited analysts from furnishing information about their reports to others prior to publication. Traders were also precluded from using such information. Both Mr. Bohan and Mr. Rugieri attended compliance meetings where power points were used to establish these points. Firm policy also precluded trading on inside information.

The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The proceeding will be set for hearing.