When does a friendship give rise to personal benefit?
S.E.C. v. McGinnis – order denying Defendants’ MSJ entered on Sept. 23, 2015
The SEC alleges that McGinnis, the tipper, received a personal benefit from Pugatch, the tippee, because Pugatch provided McGinnis “with a number of benefits in exchange for material nonpublic information including his friendship, trading advice, potential business opportunities, and modest gifts.” S.E.C. v. McGinnis, No. 5:14-cv-6, 2015 WL 5643186, at *7, (D. Vt. Sept. 23, 2015). McGinnis worked for Keurig Green Mountain (“KGM”) as an information technology employee who traded in KGM stock and based on forensic analysis provided by the SEC, he used login and password access to view material nonpublic information on KMG’s portals. Id. at *2, 5. Pugach, a close friend of McGinnis, became a self-employed day trader of KGM and other securities and spoke regularly with McGinnis about KGM trades. Id. at *3. The remote tippee, Suchowiejko, and Pugach are acquaintances whose wives are related through marriage and Pugach recommended KGM as a good investment to Suchoweijko. Id. at *4. .
The court found that based on the facts alleged, a rational jury could find that McGinnis received a personal benefit as a quid pro quo for the alleged exchange of KGM’s material nonpublic information to Pugach, id. at *20, and find that Suckowiekjo was aware of that benefit, id. at *23. The court reached this decision because the SEC proffered evidence of a close longstanding friendship between McGinnis and Pugach, “which included attending the same school, working at the same employer for a period of time, Mr. Pugach’s serving as a groomsman at Mr. McGinnis’s wedding, a friendship between their respective wives, the exchange of gifts, and Mr. Pugach’s assistant in tasks at Mr. McGinnis’s home.” Id. at *19. The court acknowledged that even if the gifts were of nominal value such that no rational juror could find they represent a quid pro quo for insider information, they still remain relevant to explain the degree of their relationship. Id. The SEC also proffered evidence of a close business relationship between the two men including the exchange of information regarding KGM stock and their joint viewing of KGM’s public earnings statements in McGinnis’s home. Id. In exchange for such information, Pugach advised McGinnis “how best to exploit the KGM insider information in trading activity” along with other trading advice on different securities. Id.
In re Bolan and Ruggieri – decided by ALJ Sept. 14, 2015
Judge Patil dismissed the SEC’s action for insider trading because it failed to demonstrate that the alleged tipper acquired any personal benefit where the SEC argued that the “tipper” gained mentorship, potential furtherance in his career, and furthering a friendship. In the Matter of Gregory T. Bolan, Jr., & Joseph C. Ruggieri, Release No. 877, at 1 (Sept. 14, 2015). Bolan, a Wells Fargo research analyst, allegedly tipped Ruggieri of forthcoming ratings changes as to six stocks before that information was made public. Id. Ruggieri profited by trading on that information, ahead of the ratings changes. Id. Judge Patil, however, found that the SEC did not meet its burden to establish that Bolan tipped Ruggieri for a personal benefit within the meaning of Dirks and Newman, which instructs courts to focus on objective criteria. Id. at 30.
Judge Patil cautioned that “Courts cannot simply assume that a breach is for personal benefit.” Id. While the SEC argued that Bolan earned from Ruggieri the benefit of career mentorship and positive feedback that would potentially increase his annual bonus and improve his chances of promotion, the court found this argument far too tenuous to constitute a personal benefit. Id. at 35. The court also rejected the SEC’s allegation that personal benefit can be in the form of maintaining and furthering a friendship. Id. at 43-44 (stating the benefit received must be “something more than the ephemeral benefit of the value of friendship) (quoting Newman, 773 F. 3d at 452). The court further reasoned that “[i]t is just as plausible that Bolan’s tips were simply incidental to his professional relationship with Ruggieri as opposed to party of any quid pro quo.” Id. at 46.
These two cases suggest that in cases where the tipper and tippee have an established friendship, the SEC must demonstrate that the tipper actually received something of tangible value in exchange for material information– something beyond furthering a friendship and inherent to the relationship — to meet the personal benefit test.
If you’re thinking about what would be the analysis under relationships that may exceed the bounds of friendship, stay tuned for Part III!