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Securities and Exchange Commission v. Andrade

United States District Court, D. Rhode Island

January 15, 2016

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
ANTHONY ANDRADE, et al., Defendants.

MEMORANDUM AND ORDER

WILLIAM E. SMITH CHIEF JUDGE

Before the Court are Motions to Dismiss filed by Defendants Kenneth Rampino and Anthony Andrade (ECF Nos. 13 and 15, respectively). The Securities and Exchange Commission (“SEC”) filed oppositions (ECF Nos. 18 and 19), and Rampino and Andrade filed replies (ECF Nos. 23 and 24). After careful consideration, Defendants’ motions are DENIED for the reasons set forth below.

I. Background

The SEC alleges that Defendant Andrade, who was on the Board of Directors of Bancorp Rhode Island, Inc. (“Bancorp RI”), committed insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, by tipping several of his friends - Defendant Rampino, Robert Kielbasa, and Fred Goldwyn - that Bancorp RI was in the process of being acquired.[1] Shortly after speaking with Andrade, Rampino, Kielbasa, and Goldwyn “made large, out-of-character, and spectacularly well-timed purchases of stock in Bancorp RI.” (SEC Opp’n to Andrade Mot. to Dismiss 3, ECF No. 19.)

It is hard to imagine a case with better alleged circumstantial evidence of insider trading. Goldwyn and Kielbasa both purchased a large amount of Bancorp RI stock less than half an hour after speaking with Andrade, and Kielbasa apparently told his investment advisor that he had a friend who had suggested that Bancorp RI would be a good investment. (Compl. ¶¶ 56-57, 96-97, ECF No. 1.) Rampino spoke with Andrade on Friday, April 15, 2011, and then proceeded to purchase 1, 500 shares of Bancorp RI the following Monday, April 18. (Id. ¶¶ 129-30.) None of the three “tippees” had any legitimate business justification to know about Bancorp RI’s merger negotiations. (Id. ¶¶ 45, 84, 123.) Moreover, over the past decade, all three had primarily traded in mutual funds rather than individual company stocks. (Id. ¶¶ 55, 91, 131.) The Bancorp RI acquisition became public on April 20, and the price of Bancorp RI shares increased by 43 percent. (Id. ¶ 36.) Finally, when asked about these trades and phone conversations, all of the defendants exercised their Fifth Amendment right against self-incrimination. (Id. ¶¶ 73-81, 112-20, 133-42.)

II. Discussion

In ruling on a motion to dismiss, the Court must “accept the well-pleaded facts as true, viewing factual allegations in the light most favorable to the plaintiff.” Rederford v. U.S. Airways, Inc., 589 F.3d 30, 35 (1st Cir. 2009). However, “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 570 (2007)). A claim is facially plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678.

Because insider trading cases are securities fraud claims, the SEC generally must satisfy the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure. However, district courts in the Southern District of New York - in which a high volume of insider trading cases are litigated - have held that these requirements may be relaxed in cases like this one, where facts are “peculiarly within the [defendants’] knowledge.” SEC v. Payton, 97 F.Supp.3d 558, 563 n.3 (S.D.N.Y. 2015); see also SEC v. One or More Unknown Traders in the Secs. of Onyx Pharms., Inc., No. 13-CV-4645 (JPO), 2014 WL 5026153, at *4 (S.D.N.Y. Sept. 29, 2014) (“Rule 9(b) is therefore relaxed only to the following extent: if a tip took place under circumstances known only to the defendant and the tipper, the plaintiff may plead a belief about the content and the circumstances of the tip, coupled with particular facts supporting that belief.”). Andrade argues that the First Circuit applies Rule 9(b) strictly, and thus these Southern District of New York cases are not good law in the First Circuit. (See Andrade Reply 2-3, ECF No. 24.) However, the Court need not reach this issue because, as explained below, even under the stricter Rule 9(b) standard, the SEC has alleged sufficient facts to state a claim against Defendants Rampino and Andrade.

In Dirks v. SEC, the U.S. Supreme Court held that, in order to prove liability for insider trading, the government must show that “the insider personally will benefit, directly or indirectly, from his disclosure.” 463 U.S. 646, 662 (1983). The Court made clear that “[a]bsent some personal gain, there has been no breach of duty to stockholders.” Id. The Court further noted that:

There are objective facts and circumstances that often justify such an inference [of personal benefit]. For example, there may be a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.

Id. at 664 (emphasis added). The First Circuit has likewise stated that “[t]he ‘benefit’ to the tipper need not be ‘specific or tangible.’ . . . A gift to a friend or relative is sufficient.” SEC v. Sargent, 229 F.3d 68, 77 (1st Cir. 2000) (quoting SEC v. Warde, 151 F.3d 42, 48-49 (2d Cir. 1998)); see also SEC v. Rocklage, 470 F.3d 1, 7 n.4 (1st Cir. 2006) (“[T]he mere giving of a gift to a relative or friend is a sufficient personal benefit.”).

Relying on the Second Circuit’s decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), cert. denied, 136 S.Ct. 242 (2015), Defendants argue that the SEC has failed to sufficiently allege that Andrade received a personal benefit and that Rampino knew about that benefit. The court in Newman found that:

“[P]ersonal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, any reputational benefit that will translate into future earnings and the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.” [United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013).] This standard, although permissive, does not suggest that the Government may prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature. If that were true, and the Government was allowed to meet its burden by proving that two individuals were alumni of the same school or attended the same church, the personal benefit requirement would be a nullity. To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee, where the tippee’s trades “resemble trading by the insider himself followed by a gift of the profits to the recipient, ” see 463 U.S. at 664, . . . such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature. In other words, as Judge Walker noted in Jiau, this requires evidence of “a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].” Jiau, 734 F.3d at 153.

Newman, 773 F.3d at 452 (emphasis added). Thus, Defendants argue, the SEC has alleged no facts showing the requisite “meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable ...


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