Securities and Exchange Commission v. Andrade et al
Filing
27
MEMORANDUM AND ORDER denying 13 Motion to Dismiss; denying 15 Motion to Dismiss for Failure to State a Claim. So Ordered by Chief Judge William E. Smith on 1/15/2016. (Jackson, Ryan)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
___________________________________
)
)
)
)
Plaintiff,
)
)
v.
)
)
ANTHONY ANDRADE, et al.,
)
)
Defendants.
)
___________________________________)
SECURITIES AND EXCHANGE
COMMISSION,
C.A. No. 15-231 S
MEMORANDUM AND ORDER
WILLIAM E. SMITH, Chief Judge.
Before the Court are Motions to Dismiss filed by Defendants
Kenneth
Rampino
respectively).
and
Anthony
Andrade
(ECF
Nos.
13
and
15,
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 10b5 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
circumstantial evidence of insider trading.
with
better
alleged
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.
ECF No. 1.)
(Compl. ¶¶ 56-57, 96-97,
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
1
Kielbasa and Goldwyn have both reached settlements with the
SEC and consented to final judgment against them. (See ECF Nos.
1-2 and 1-4.)
2
defendants exercised their Fifth Amendment right against selfincrimination.
II.
(Id. ¶¶ 73-81, 112-20, 133-42.)
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.,
3
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
particular facts supporting that belief.”).
tip,
coupled
with
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.
4
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
5
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 nature,” id., between Andrade
and his tippees.
The Court is not persuaded.
Although not bound by Newman, the Court acknowledges the
particular expertise of the Second Circuit in this area.
See
United States v. Salman, 792 F.3d 1087, 1092 (9th Cir. 2015) (“[W]e
would not lightly ignore the most recent ruling of our sister
circuit
[Newman]
encountered.”).
in
an
area
However,
of
law
Newman
that
was,
it
both
has
frequently
factually
and
procedurally, a very different case from this one.
For starters, Newman did not involve a motion to dismiss; it
was
an
appeal
from
a
judgment
in
a
criminal
trial.
This
distinction is significant: at a criminal trial, the government
must prove its case beyond a reasonable doubt, while a plaintiff
defending against a motion to dismiss must only show that its
complaint is plausible on its face.
Thus, even assuming Newman
applies, the question of whether the government has presented
“proof
of
a
meaningfully
close
6
personal
relationship
that
generates
an
exchange
that
is
objective,
consequential,
and
represents at least a potential gain of a pecuniary or similarly
valuable nature,” Newman, 773 F.3d at 452, must be evaluated in
the context of the proper standard for a motion to dismiss.
Furthermore, as the SEC points out in its briefing, Newman
“involved tippees several layers of tipping down the chain from
the insider who was the source of the confidential information.”
(SEC Opp’n to Andrade Mot. to Dismiss 15, ECF No. 19.) By contrast,
here, Andrade directly tipped each of the tippees.
Thus, not only
was the burden of proof higher, more was required to meet that
burden in order to prove that the original tipper – who did not
communicate directly with the final tippees – received a benefit.
The Ninth Circuit’s recent decision in Salman, 792 F.3d 1087,
written by Southern District of New York Judge Rakoff, sitting by
designation, cautions against taking Newman too far out of its
context.
There, the defendant had been convicted of insider
trading based on a series of tips he received from his brotherin-law, Michael Kara, who had in turn received that information
from another Kara brother, Maher.
At trial, “the Government
presented evidence that Salman knew full well that Maher Kara was
the source of the information.”
Salman
argued
relationship
that
between
Id. at 1089.
“evidence
tipper
of
and
a
Relying on Newman,
friendship
tippee,
or
standing
familial
alone,
is
insufficient to demonstrate that the tipper received a benefit”
7
and there was “no evidence that Maher received any such tangible
benefit in exchange for the inside information, or that Salman
knew of any such benefit.”
Id. at 1093.
The court found that:
To the extent Newman can be read to go so far, we
decline to follow it.
Doing so would require us to
depart from the clear holding of Dirks that the element
of breach of fiduciary duty is met where an “insider
makes a gift of confidential information to a trading
relative or friend.”
. . . If Salman’s theory were accepted and this
evidence found to be insufficient, then a corporate
insider or other person in possession of confidential
and proprietary information would be free to disclose
that information to her relatives, and they would be
free to trade on it, provided only that she asked for no
tangible compensation in return. Proof that the insider
disclosed material nonpublic information with the intent
to benefit a trading relative or friend is sufficient to
establish the breach of fiduciary duty element of
insider trading.
Id. at 1093-94 (quoting Dirks, 463 U.S. at 664).
Put another way,
the evidence showed a relationship close enough that “the tip and
trade resemble trading by the insider himself followed by a gift
of the profits to the recipient.”
Dirks, 463 U.S. at 664.
However, not every relationship rises to this level, and that
seems to be the concern in Newman: something other than “the mere
fact of a friendship, particularly of a casual or social nature,”
Newman, 773 F.3d at 452, is required to support the inference that
the tip was intended as “a gift of confidential information to a
trading relative or friend.”
does
not
foreclose
the
Dirks, 463 U.S. at 664.
possibility
8
that
in
some
Yet this
cases
–
particularly close familial relationships – the fact that the tip
was given and traded on is, on its own, enough for an inference of
the intention to benefit. Indeed, the court in Newman specifically
states, “[i]n other words . . . 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].’”
Newman, 773 F.3d at 452 (emphasis added) (quoting
Jiau, 734 F.3d at 153).
For
example,
in
Salman,
there
was
a
“close
fraternal
relationship,” 792 F.3d at 1090; likewise, in Rocklage, the First
Circuit found that “[t]he gift of information Mrs. Rocklage gave
her brother” met the benefit standard.
added).
470 F.3d at 7 n.4 (emphasis
By contrast, if the relationship is merely “of a casual
or social nature,” then the government must put forth evidence 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.”
Newman, 773 F.3d at 452.
This makes sense:
people are unlikely
to take the risk of disclosing confidential information to a mere
casual acquaintance unless there is something in it for them;
however, they might take that risk for a close friend or family
member solely with the intention to benefit that person.
That said, the Court need not decide the scope and reach of
Newman’s application at this juncture.
9
Even assuming that the SEC
must prove “a potential gain of a pecuniary or similarly valuable
nature,” id., the Complaint states a plausible claim. With respect
to Defendant Rampino in particular, the Court notes that the
allegation that “Andrade personally went with one of his property
service vendors to Rampino’s home to help resolve a septic issue
for Rampino” (Compl. ¶ 128, ECF No. 1), makes it highly plausible
that Rampino and Andrade have the type of relationship where there
was, at a minimum, a give and take of sorts that had the potential
for pecuniary gain. 2
Rampino further argues that “[a]lthough the SEC generally
alleges that Mr. Rampino knew that Mr. Andrade was breaching his
fiduciary duty (Complaint at ¶ 123), the Complaint does not contain
any allegation that Mr. Rampino knew that Mr. Andrade received the
requisite personal benefit.”
13 (emphasis in original).)
(Rampino Mot. to Dismiss 8, ECF No.
Yet the exact paragraph of the
Complaint that Rampino cites states that “Rampino further knew
that
Andrade
provided
him
the
tip
of
material,
non-public
information concerning Bancorp RI’s imminent merger as an illicit
2
Regarding Defendants’ assertion of their Fifth Amendment
rights, Rampino is correct that this allegation standing alone
cannot survive a motion to dismiss. (See Rampino Reply 6 n.4, ECF
No. 23.)
However, the Court may and does consider Defendants’
invocation of the Fifth Amendment in conjunction with the rest of
the SEC’s allegations. See Gannett v. Carp (In re Carp), 340 F.3d
15, 23 (1st Cir. 2003) (“[T]he trial court has discretion over
whether a negative inference is an appropriate response to the
invocation of the Fifth Amendment in a particular civil case.”).
10
gift or business opportunity to profit upon.”
No. 1 (emphasis added).)
128
concerning
Andrade’s
(Compl. ¶ 123, ECF
This paragraph, combined with paragraph
repair
of
Rampino’s
sewer,
and
the
allegation that their relationship was a long term friendship (id.
¶¶ 125, 127), are sufficient to plead that Rampino knew about the
benefit to Andrade.
(See SEC Opp’n to Rampino Mot. to Dismiss 21,
ECF No. 18 (“Rampino was, of course, aware of his 20-year-long
friendship and business association with Andrade, as well as the
personal benefits and favors he and Andrade had exchanged.”).)
Finally, as explained above, these facts are sufficient to
satisfy the stricter pleading standard of Rule 9(b).
Even under
Newman, the SEC does not need to allege any specific tangible
benefit; at most, it needs to plead specific facts showing that
Defendants’ relationship is “meaningfully close” enough to support
an inference that there is “at least a potential gain of a
pecuniary or similarly valuable nature.”
Newman, 773 F.3d at 452.
The Court finds that the SEC has done so. 3
3
The Court need not reach the issue of whether it may consider
the invoice attached to Defendant Rampino’s motion. (See Rampino’s
Mot. to Dismiss 9-10, ECF No. 13; SEC’s Opp’n to Rampino’s Mot. to
Dismiss 22-24, ECF No. 18.) As the SEC pointed out during oral
argument, the Complaint alleges that “Rampino provided advice to
Andrade and Andrade’s son regarding a problematic real estate issue
Andrade’s son was having” and “Rampino’s law firm has no record of
billing Andrade for this professional time.” (Compl. ¶ 128, ECF
No. 1 (emphasis added).) Thus, even if the Court were to consider
this document, it would have no bearing on the allegation that
Andrade was not billed for advice that he received concerning his
son’s real estate issues.
11
III. Conclusion
For the foregoing reasons, Defendants’ Motions to Dismiss
(ECF Nos. 13 and 15) are hereby DENIED.
IT IS SO ORDERED.
William E. Smith
Chief Judge
Date: January 15, 2016
12
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