596 F.Supp.3d 227
D. Mass.2022Background:
- Gregory Lemelson, as CIO of Lemelson Capital Management (LCM), ran the Amvona Fund and shorted Ligand Pharmaceuticals between May–Oct 2014; the fund realized roughly $1.3 million profit from the campaign.
- Lemelson published reports and gave Benzinga interviews in June–July 2014 containing three statements the jury found materially false (including a statement that Ligand’s key product Promacta was “going away” and statements about Viking’s auditing/preclinical plans).
- The jury (Nov. 5, 2021) found Lemelson liable for those three false statements under Section 10(b)/Rule 10b-5, but rejected scheme liability and rejected Advisers Act claims.
- The SEC sought (inter alia) a permanent injunction, Tier III civil penalties of $656,500 (Lemelson) and $775,000 (LCM), disgorgement of $656,500 (joint & several), and prejudgment interest.
- The Court (Saris, D.J.) held that an injunction was warranted but limited it to five years; it imposed a Tier III civil penalty of $160,000 on Lemelson, denied disgorgement, and refused separate penalties for LCM.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Injunction (permanent vs. limited) | Permanent injunction needed due to egregious, repetitive fraud and risk of recidivism | No permanent injunction: isolated statements, remote in time, no prior misconduct, and equities weigh against | Injunction appropriate but not permanent; five-year injunction imposed (recidivism risk, continued adviser role, lack of contrition) |
| Civil penalty tier & amount | Tier III; penalty equal to pecuniary gain ($656,500) is appropriate | At most Tier II; SEC failed to show substantial loss or risk; $160,000 (Tier II cap) should apply | Tier III designation appropriate on facts, but statutory cap/appropriate penalty set at $160,000 (court refused SEC’s full pecuniary-gain figure) |
| Disgorgement of profits ($656,500) | Disgorgement of campaign profits warranted; joint & several liability for entity and Lemelson | Liu limits disgorgement to net profits for victims; SEC failed to identify victims or reasonably approximate profits causally linked to the three statements | Disgorgement denied: SEC failed to show causal link between whole campaign profits and the specific false statements and offered no firm victim-identification/Fair Fund plan under Liu v. SEC |
| Separate penalty for LCM | LCM enabled and should face independent penalty (SEC sought $775,000) | Parties agreed pretrial to focus liability on Lemelson as proxy for LCM; separate penalty would double-count | No separate civil penalty for LCM; prior trial agreement and facts do not support distinct penalties |
Key Cases Cited
- SEC v. Sargent, 329 F.3d 34 (1st Cir. 2003) (injunction standard: reasonable likelihood of recidivism and factors to assess it)
- Aaron v. SEC, 446 U.S. 680 (U.S. 1980) (foundational discussion of SEC equitable remedies)
- SEC v. Am. Bd. of Trade, Inc., 751 F.2d 529 (2d Cir. 1984) (caution that injunction is a drastic remedy for active securities professionals)
- SEC v. Kern, 425 F.3d 143 (2d Cir. 2005) (court discretion in setting civil penalty tiers)
- Liu v. SEC, 140 S. Ct. 1936 (U.S. 2020) (disgorgement limited to net profits causally related to wrongdoing and must benefit victims)
- SEC v. MacDonald, 699 F.2d 47 (1st Cir. 1983) (disgorgement requires causal connection and a cut-off for later profits)
- SEC v. Razmilovic, 738 F.3d 14 (2d Cir. 2013) (burden on SEC to establish a reasonable approximation of profits causally related to fraud)
- SEC v. First City Fin. Corp., 890 F.2d 1215 (D.C. Cir. 1989) (equitable power limited to property causally related to wrongdoing)