SEC v. LemelsonSEC v. Lemelson
Kevin P. Martin, with whom William E. Evans III, Goodwin Procter LLP, Douglas S. Brooks, Brian J. Sullivan, Thomas M. Hoopes, and Libby Hoopes Brooks, P.C. were on brief, for appellants.
Ezekiel L. Hill, Attorney, Securities and Exchange Commission, with whom Dan M. Berkovitz, General Counsel, John W. Avery, Deputy Solicitor, and Paul G. Alvarez, Senior Appellate Counsel, were on brief, for appellee.
In this appeal, Lemelson argues that his three statements were protected by the First Amendment and that the SEC failed to introduce sufficient evidence to support the jury‘s determination that the statements were (1) of fact rather than opinion, (2) material, and (3) made with scienter. He also contends that the district court abused its discretion and committed an error of law in entering the injunction. We reject Lemelson‘s arguments and affirm.
I.
A.
The following facts were presented to the jury.
While working as an investment adviser and fund manager at Lemelson Capital Management, LLC, Lemelson managed all investments for a hedge fund called the Amvona Fund. In this role, Lemelson published online reports and conducted interviews regarding companies in whose stock the Amvona Fund invested. For example, Lemelson sometimes posted his reports on Seeking Alpha, a website where contributors post opinions or reports concerning financial topics. Unlike paid portals like Bloomberg where investment analysts traditionally post their research, Seeking Alpha is a non-subscription and open-forum resource, which Lemelson selected in order to expand the audience for his reports.
In May 2014, the Amvona Fund began building a short position1 in the stock of Ligand Pharmaceuticals, Inc. (“Ligand“), a biotechnology company. At the time, Ligand was a small “virtual company” that would discover or acquire the economic
Ligand‘s principal product in 2014 was Promacta, a drug that had been approved by the U.S. Food and Drug Administration
(the “FDA“) and various foreign drug agencies for treatment related to several medical disorders, including hepatitis C. Ligand partnered with other companies to manufacture and market Promacta in return for royalty payments based on those sales. As of May 2014, Ligand expected Promacta royalties to be a substantial portion of its future revenues. Promacta is still on the market today.
Ligand had also recently entered a licensing agreement with Viking Therapeutics, Inc. (“Viking“), a biopharmaceutical drug development company. Under the licensing deal, Viking would develop certain Ligand drug candidates and Ligand would acquire royalty rights and equity in Viking. Viking focused on the development of novel therapies for metabolic and endocrine disorders.
Viking had exclusive rights to five drug candidates based on molecules licensed from Ligand. As of 2014, all five drug candidates were undergoing preclinical studies or clinical trials, which were required before seeking FDA approval so that the drugs eventually could be brought to market. According to Viking‘s Form S-12 (the “Viking S-1“) filed on July 1, 2014, Viking
“intend[ed] to rely on third parties to conduct [its] preclinical studies and clinical trials.” (Emphasis omitted).
The Viking S-1 contained both audited and unaudited financial data about Viking. It also included a report from Marcum LLP, an accounting firm that had “audited [Viking‘s] . . . balance sheets . . . as of December 31, 2012 and 2013.”
Between June and August 2014, Lemelson published reports and conducted interviews in which he criticized Ligand‘s finances, prospects, and management and argued that Ligand stock was vastly overvalued. As relevant here, Lemelson made statements related to both Promacta and Viking. We describe each of the three statements for which the jury found liability.
i. The Promacta Statement
On June 16, 2014, Lemelson published his first report concerning Ligand on his website and on Seeking Alpha. The report stated that Ligand “face[d] it[s] biggest existential threat” from “what is likely to be a momentous impairment of its largest royalty generating asset, Promacta,” due largely to a competitive threat from a new drug called Sovaldi.
On June 18, Lemelson discussed Promacta‘s future during a phone call with Bruce Voss, Ligand‘s investor relations representative. The next day, Lemelson gave a radio interview for the financial website Benzinga. The interview was for Benzinga‘s online “PreMarket Prep” show, which provides investors with
information prior to market open. During the interview, Lemelson stated the following about Promacta:
Promacta accounted for 72 percent of [Ligand‘s] royalty revenues . . . [and] is literally going to go away.
I mean I had discussions with management just yesterday -- excuse me, their [investor relations] firm, and they basically
agreed. And they said, look, we understand Promacta is going away.
(Emphasis added). Lemelson‘s statement that Voss told Lemelson that Ligand understood Promacta was “going away” (the “Promacta Statement“) is the first statement at issue in this appeal.
ii. The Viking Statements
The next two statements at issue were made about two weeks later by Lemelson in his next report concerning Ligand. Both statements concerned Viking.
First, the report stated the following about Viking‘s drug development capabilities:
Viking does not intend to conduct any preclinical studies or trials and does not own any products or intellectual property or manufacturing abilities and leases space from Ligand. Viking appears to be a single-purpose vehicle created to raise more capital from public markets for its sponsor, Ligand Pharmaceuticals.
(Emphasis added). The statement that “Viking does not intend to conduct any preclinical studies or trials” (the “Preclinical
Studies Statement“) is the second statement at issue in this appeal.
Next, the report stated the following about the financial data included in the Viking S-1:
On April 7, 2014, Viking‘s Board of Directors appointed Marcum LLP as an independent registered public accounting firm stating [in the Viking S-1]:
“From September 24, 2012 (Inception) through April 7, 2014, neither we nor anyone on our behalf consulted with Marcum regarding (1) the application of accounting principles to a specified transaction, either completed or proposed, (2) the type of audit opinion that might be rendered on our financial statements, or (3) any matter that was either the subject of a disagreement . . . or a ‘reportable event’ . . . .”
In other words, Marcum was merely hired, but the company has not yet even consulted with the firm on any material issues. The financial statements provided on the [Viking S-1] accordingly are unaudited.
(Emphasis added). The statement that Viking‘s “financial statements provided on the [Viking S-1] accordingly are unaudited” (the “Audit Statement“) is the third statement at issue in this appeal.
Lemelson made the Preclinical Studies Statement and the Audit Statement (collectively, the “Viking Statements“) in support of his broader statement that Viking was a “single-purpose vehicle”
and a “shell company” being used by Ligand to “generate paper profits to stuff [Ligand‘s] own balance sheet.”
In the following months, Lemelson published several more reports critical of Viking and Promacta‘s prospects. Lemelson continued building the Amvona Fund‘s short position in Ligand stock throughout this time. Ligand‘s stock price declined, and Lemelson covered the short position on various dates for a profit.
B.
On September 12, 2018, the SEC filed a complaint against Lemelson, Lemelson Capital Management, LLC, and the Amvona Fund in the U.S. District Court for the District of Massachusetts. As later amended, the complaint alleged, inter alia, that the Promacta Statement and the Viking Statements were material misstatements of fact prohibited by Section 10(b) and Rule 10b-5.3 The case went to trial and,
After the jury verdict, Lemelson renewed his motion for judgment as a matter of law pursuant to Federal Rule of Civil Procedure 50(b). Lemelson argued, inter alia, that the Viking Statements were opinions protected by the First Amendment and that the SEC failed to produce sufficient evidence that all three statements were material and made with scienter. The district court rejected these arguments and denied the motion.
The district court then received briefing and heard argument concerning the proper remedies for Lemelson‘s violations. The SEC requested, inter alia, a $656,500 civil penalty against Lemelson and an injunction permanently enjoining him from violating Section 10(b) and Rule 10b-5. Lemelson countered that the civil penalty should be “far less” than $80,000 and that no injunction should be issued. The district court assessed a civil penalty of $160,000 and enjoined Lemelson from violating Section 10(b) and Rule 10b-5 for five years.5 Lemelson, 596 F. Supp. 3d at 238. The court rejected the SEC‘s contention that a permanent injunction was warranted, noting that Lemelson‘s “violation was
not as severe as in many of the cases where courts ordered permanent injunctions.” Id. at 233.
Lemelson timely appealed.6
II.
We review de novo a district court‘s denial of a motion for judgment as a matter of law. Suero-Algarín v. CMT Hosp. Hima San Pablo Caguas, 957 F.3d 30, 37 (1st Cir. 2020). In reviewing the record, we “construe facts in the light most favorable to the jury verdict, draw any inferences in favor of the non-movant, and abstain from evaluating the credibility of the witnesses or the weight of the evidence.” Id. We “ask whether . . . a rational jury could have found in favor of the party that prevailed,” Bisbal-Ramos v. City of Mayagüez, 467 F.3d 16, 22 (1st Cir. 2006), and set aside the jury verdict “only if the jury failed to reach the only result permitted by the evidence,” Quiles-Quiles v. Henderson, 439 F.3d 1, 4 (1st Cir. 2006).
Section 10(b) prohibits, “in connection with the purchase or sale of any security,” the “use or employ[ment]” of “any manipulative or deceptive device or contrivance in contravention” of SEC regulations.
purchase or sale of any security,” to “make any untrue statement of a material
Lemelson argues that the jury verdict must be overturned for three reasons. First, he argues that the Viking Statements were opinions that are protected by the First Amendment and nonactionable under Section 10(b) and Rule 10b-5. Second, he contends that the SEC failed to introduce evidence sufficient to prove that the Promacta Statement and Viking Statements were material. Finally, he argues that the jury lacked a sufficient basis to find that he made the Promacta Statement and Viking Statements with scienter. We address each argument in turn.
A.
Lemelson first contends that the Viking Statements were statements of opinion7 and thus were nonactionable under Rule 10b-5 and protected by the First Amendment. We disagree.
“A [Rule 10b-5] violation . . . requires a false, or misleadingly omitted, statement of fact.” Constr. Indus. & Laborers Joint Pension Tr. v. Carbonite, Inc., 22 F.4th 1, 7 (1st Cir. 2021). The “most significant difference between statements of fact and expressions of opinion is that ‘a statement of
fact . . . expresses certainty about a thing, whereas a statement of opinion . . . does not.‘” Id. (quoting Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175, 183 (2015)).
A reasonable jury could have concluded that the Viking Statements “expresse[d] certainty about . . . thing[s],” and thus were actionable statements of fact, for a number of reasons. Omnicare, 575 U.S. at 183. In the Preclinical Studies Statement, Lemelson wrote that “Viking does not intend to conduct any preclinical studies or trials,” and in the Audit Statement, he asserted that Viking‘s “financial statements provided on the [Viking S-1] . . . are unaudited.” Neither statement was prefaced by words like “I think” or “I believe,” which “can play a role in demonstrating a lack of certainty.” Carbonite, 22 F.4th at 7 (citing Omnicare, 575 U.S. at 187). Both statements were factually contradicted by the Viking S-1, which included audited financial data and stated Viking‘s intention to “expend substantial funds in research and development, including preclinical studies and clinical trials.” Indeed, Lemelson himself in his testimony characterized the Audit Statement as a “mistake[n]” reading of the Viking S-1. And even though Viking intended to have third parties conduct preclinical studies and clinical trials on its behalf, a rational jury could have found the Preclinical Studies Statement to be, at the least, a misleading “half-truth[]” actionable under
Rule 10b-5. SEC v. Johnston, 986 F.3d 63, 72 (1st Cir. 2021); see also Lucia v. Prospect St. High Income Portfolio, Inc., 36 F.3d 170, 175 (1st Cir. 1994) (“[T]he fact that a statement is literally accurate does not preclude liability under federal securities laws.“).
Lemelson cites a series of First Circuit defamation cases for the proposition that the First Amendment generally precludes liability “when the speaker ‘outlines the facts available to him, thus making it clear that the challenged statements represent his own interpretation of those facts and leaving the reader free to draw his own conclusions.‘” McKee v. Cosby, 874 F.3d 54, 61 (1st Cir. 2017) (quoting Riley v. Harr, 292 F.3d 282, 289 (1st Cir. 2002)); see also, e.g., Phantom Touring, Inc. v. Affiliated Publ‘ns, 953 F.2d 724, 730 (1st Cir. 1992). Lemelson reasons that the Viking Statements simply “interpret[ed]” the facts in the Viking S-1, and thus that the statements were protected opinions.
The SEC argues that the First Amendment principles at issue are limited to the defamation context, and notes that Lemelson has failed to cite any cases applying those principles in the context of Section 10(b) and Rule 10b-5. Because we determine the Viking Statements to be statements of fact, we need not decide whether the cases cited by Lemelson reach beyond defamation law. Even were we to consider these cases and apply de novo review, see
Naser Jewelers, Inc. v. City of Concord, 513 F.3d 27, 32 (1st Cir. 2008), Lemelson‘s argument fails because the Viking Statements “reasonably would be understood to declare or imply provable assertions of fact,” McKee, 874 F.3d at 60-61 (quoting Phantom Touring, 953 F.2d at 727). Far from presenting interpretations of the facts contained in the Viking S-1, the Viking Statements are flatly inconsistent with those facts. See, e.g., Piccone v. Bartels, 785 F.3d 766, 771 (1st Cir. 2015) (“[T]he speaker can immunize his statement from defamation liability by fully disclosing the non-defamatory facts on which his opinion is based.” (emphasis added)); id. at 774 (“The First Amendment generally protects statements of opinion where the speaker ‘outlines the facts available to him, thus making it clear that the challenged statements represent his own interpretation of those facts . . . .‘” (internal quotation marks omitted) (quoting Riley, 292 F.3d at 289) (emphases added)); see also Cheng v. Neumann, 51 F.4th 438, 444 (1st Cir. 2022) (noting that “statement[s] of opinion” without “provably false factual connotation[s]” can receive First Amendment protection against defamation suits (quoting Milkovich v. Lorain J. Co., 497 U.S. 1, 20 (1990))). Further, Lemelson was “claiming to be in possession of objectively verifiable facts,” not merely “expressing a subjective view” of the Viking S-1. McKee, 874 F.3d at 61 (quoting Riley, 292 F.3d at 289); see also Cheng, 51 F.4th at 444.
B.
Lemelson next argues that even if all three statements were untrue statements of fact, a reasonable jury could not have, on the evidence presented, concluded that the statements were material.
Liability under subsection (b) of Rule 10b-5 only lies with respect to misstatements or omissions of “material fact.”
We first address the Promacta Statement and then address the Viking Statements. We conclude that the SEC introduced evidence sufficient for a rational jury to find all three statements material.
i.
The controversy over the Promacta Statement stemmed from the June 18 phone call between Lemelson and Voss. No transcript of the call was introduced at trial, and Lemelson and Voss offered
different accounts of their dialogue. According to Lemelson, Voss “said [Ligand] agreed that [Sovaldi] would eliminate the
A reasonable jury could have found the Promacta Statement material. First, the SEC introduced evidence demonstrating the importance of Promacta to Ligand‘s bottom line. See Carbonite, 22 F.4th at 8 (noting that the “importan[ce] [of a] product” to a company is relevant in determining the materiality of a statement concerning that product‘s effectiveness). Ligand had released positive revenue data for Promacta, noting, for example, that increased Promacta royalties contributed to aggregate royalty revenues of $7.9 million for the three months ending March 31, 2014, compared to $5.8 million for the same period in 2013. Further, witness testimony demonstrated that investment analysts had projected augmented Promacta revenues from 2015 to
2020, that Promacta could potentially expand into new geographic markets, and that new medical applications for Promacta were being pursued. And the jury also considered evidence that Sovaldi would not negatively impact Promacta sales to patients with certain medical conditions. Ligand thus had “expected [Promacta royalties] to be a substantial portion of [its] ongoing revenues” and knew that setbacks for Promacta “could significantly impair [Ligand‘s] operating results and/or reduce the market price of [its] stock.”
The SEC also produced evidence demonstrating investors’ alarm and concern about the Promacta Statement and that they communicated those concerns to Ligand. For example, one Ligand shareholder emailed Ligand about the Benzinga interview and stated that the Promacta Statement “seem[ed] to [the shareholder] to be a flat out falsehood” that warranted “legal action.” Ligand‘s President, Matthew Foehr, wrote an email the day after the interview stating that Foehr was “fielding questions from pretty major [share]holders” about the interview. Further, the SEC introduced the testimony of Robert Fields, a portfolio manager who testified that it “[w]ould . . . have been important to [him] as an investor in Ligand if Promacta was, in fact, going away” because
Promacta “made up the majority of the current revenue of [Ligand]” and was Ligand‘s “largest source of cash flow.”8
The jury also considered evidence that Lemelson himself took credit for the decline in Ligand‘s stock value in the summer of 2014. For example, in an email to another investment adviser in October 2014, Lemelson wrote that his “multi-month battle with [Ligand]” was “paying off” because it resulted in Ligand‘s shares being “down ~40% since [Lemelson] published”
Lemelson contends that the Promacta Statement cannot have been material given that Voss signaled at least “tacit agreement” by failing to respond to Lemelson‘s comment that Promacta was “going to go away.” But this argument does not confront the fact that during his interview with Benzinga, Lemelson stated that Voss affirmatively “said” that Promacta was going away.
Voss testified that he “[a]bsolutely [did] not” say those words or “anything to that effect.” A rational jury could have found Voss‘s account of the phone call more credible than Lemelson‘s. See Suero-Algarín, 957 F.3d at 37 (noting that when adjudicating a motion for judgment as a matter of law, the court must “abstain from evaluating the credibility of the witnesses“). A rational jury could also find that investors would likely react much more adversely to news that Ligand said Promacta was going away than they would to news that a Ligand representative said nothing when Lemelson so claimed, while also saying that Promacta had a “bright future.”