Securities & Exchange Commission v. Yang
2015 U.S. App. LEXIS 13125
7th Cir.2015Background
- Yang, a Chinese citizen and sole manager of Prestige (BVI), purchased Zhongpin securities (U.S.-listed) personally immediately before Prestige bought a >5% stake; he did not disclose his personal purchases to Prestige.
- Yang bought 50,000 Zhongpin shares and options in a SogoTrade account jointly opened with another person; Prestige later purchased ~3.2 million Zhongpin shares, triggering a Schedule 13D filing.
- Yang and others filed original and amended Schedule 13D for Prestige that omitted Yang’s personal purchases and contained a statement implying no other transactions by Reporting Persons in the prior 60 days.
- The SEC sued alleging front-running (violations of Exchange Act §10(b), Rule 10b-5, and Advisers Act §206) and that the Schedule 13D omission was fraudulent/deceptive under §10(b)/Rule 10b-5 and violated §13(d)/Rule 13d-1.
- A jury found Yang liable for front-running and for filing a fraudulent Schedule 13D omission; the court entered a permanent injunction and assessed a $150,000 civil penalty.
Issues
| Issue | Plaintiff's Argument (SEC) | Defendant's Argument (Yang) | Held |
|---|---|---|---|
| Jurisdiction under Exchange Act and Advisers Act | U.S. courts have jurisdiction because Yang’s trades were on U.S. exchanges and constituted conduct within the U.S. | Statutes don’t reach Yang because he, Prestige, and investors are foreign (China/BVI) | Court: Jurisdiction proper; trades on U.S. exchanges are conduct within the U.S.; Morrison does not preclude application here |
| Whether front-running violates federal securities law | Front-running by an adviser constitutes deceptive conduct under §10(b)/Rule 10b-5 and Advisers Act §206 | Argues front-running is not actionable under these statutes (raised on appeal) | Forfeited on appeal for failure to raise in district court; court declines to reach the merits |
| Materiality of omission on Schedule 13D | Omission of Yang’s personal purchases rendered the filing fraudulent/deceptive; materiality supported by record | Omission was trivial (50,000 shares small relative to volume) and not material | Forfeited on appeal for failure to raise below; court finds record contains some evidence of materiality and declines to reverse |
| Injunction scope | Injunction appropriate given past violations and reasonable likelihood of future violations; court may consider post-violation conduct | Court relied on trading during litigation and other conduct not tried; injunction too broad and harsh given limited investor harm | Court: injunction not an abuse of discretion; district court properly considered totality of circumstances, including subsequent trading, and reasonably found likelihood of future violations |
Key Cases Cited
- Morrison v. National Australia Bank Ltd., 561 U.S. 247 (limits extraterritorial reach of §10(b) but supports application here because securities were U.S.-listed)
- Arbaugh v. Y & H Corp., 546 U.S. 500 (distinguishes subject-matter jurisdiction from merits-based statutory challenges)
- SEC v. Holschuh, 694 F.2d 130 (7th Cir.) (standard for injunctive relief: following a past violation, court may enjoin where there is reasonable likelihood of future violations based on totality of circumstances)
- SEC v. Cherif, 933 F.2d 403 (7th Cir.) (abuse-of-discretion standard for reviewing SEC injunctions)