Securities and Exchange Commission v. Lemelson

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

___________________________________

)

SECURITIES AND EXCHANGE COMMISSION,)

)

Plaintiff, )

) Civil Action

v. ) No. 18-11926-PBS

)

GREGORY LEMELSON and LEMELSON )

CAPITAL MANAGEMENT, LLC, )

)

Defendants, )

)

and )

)

THE AMVONA FUND, LP, )

)

Relief Defendant. )

______________________________ )

MEMORANDUM AND ORDER

March 30, 2022

Saris, D.J.

INTRODUCTION

The Securities and Exchange Commission (“SEC”) brought a

civil enforcement action against Defendants Gregory Lemelson

(“Lemelson”) and Lemelson Capital Management, LP (“LCM”) for

violations of the Securities Exchange Act and the Investment

Advisers Act of 1940 (the “Advisers Act”). Following a trial,

the jury returned a mixed verdict on November 5, 2021, finding

Lemelson liable for three false statements and not liable under

a scheme liability theory and the Advisers Act. The SEC now

moves for entry of final judgment (Dkt. 244). The SEC requests

this Court order: (1) an injunction permanently restraining and

enjoining Defendants from violating Section 10(b) of the

Securities Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17

C.F.R. § 240.10b-5]; (2) a $656,500 civil penalty against

Lemelson; (3) a $775,000 civil penalty against LCM; (4) $656,500

in joint and several disgorgement against Lemelson and LCM; and

(5) prejudgment interest of $208,624. Lemelson opposes all five

components of the proposed order (Dkt. 260). After hearing, the

Court enters the following final judgment: Defendants are

enjoined from violating Section 10(b) of the Exchange Act and

Rule 10b-5 for a period of five years, and Lemelson is ordered

to pay a Tier III civil penalty in the amount of $160,000.

FACTUAL BACKGROUND

I. The Charged Conduct

Lemelson served as Chief Investment Officer of LCM in 2014.

Lemelson managed the Amvona Fund through LCM, and he “made all

investment decisions for that fund.” Dkt. 246-5 (Parties’

Agreed-to Facts), ¶ 5. Beginning in May 2014, the Amvona Fund

took a short position in shares of Ligand Pharmaceuticals, Inc.

Lemelson and LCM took a short position on behalf of the Amvona

Fund on thirteen dates between May 2014 and October 2014. The

total short position from this period was $5,082,334.60. Between

June and August of that year, Lemelson published five reports

concerning Ligand. In a report published July 3, 2014, Lemelson

represented that Viking Therapeutics, Inc., (“Viking”), a

company that signed a licensing deal with Ligand, “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.” Dkt. 246-11 at 7.

Lemelson wrote that “Viking appears to be a single-purpose

vehicle created to raise more capital from public markets for

its sponsor, Ligand Pharmaceuticals.” Id. In the same report,

Lemelson mused that Viking had a “curious relationship” with its

accounting firm and stated that Viking “has not yet even

consulted with the firm on any materials issues” and “[t]he

financial statements provided on the S1 accordingly are

unaudited.” Id. at 9–10.

Between June and October, Lemelson also gave four

interviews on Benzinga Premarket Prep Shows (“Benzinga”). During

his interview with Benzinga on June 19, 2014, Lemelson described

a phone call with Bruce Voss, Ligand’s investor relations firm

representative. Lemelson said “It’s literally going to go away,

I mean, I had discussions with [Ligand] management just

yesterday – excuse me, their [Ligand’s] IR [investor relations]

firm. And they basically agreed. They said, ‘Look, we understand

Promacta’s going away.’” Dkt. 246-5, ¶ 14. Lemelson and LCM

covered the short position on five dates, for a total of

$3,785,690.19. The Amvona Fund profited $1,296,644.41 from the

short position in Ligand.

II. The Litigation

The SEC charged Lemelson and LCM with violations of Section

10(b) and Rule 10b-5 of the Securities Exchange Act and Section

206(4) and Rule 206(4)-8 of the Investment Advisers Act. The

jury determined that the SEC proved Lemelson “intentionally or

recklessly made untrue statements of a material fact or omitted

to state a material fact necessary in order to make the

statements made, in light of the circumstances under which they

were made, not misleading” as to the Benzinga interview, the

Viking audit statement, and the Viking preclinical trial

statement. Dkt. 246-8 (Verdict Form) at 1-2.

The jury answered “No” for the allegedly false statements

about Ligand’s insolvency and found no Rule 10b-5 scheme

liability. The jury also answered “No” on the two questions

related to whether the SEC proved that Lemelson intentionally,

recklessly, or negligently violated the Advisers Act. Id.

Over the course of this acrimonious litigation, this Court

has issued opinions on a motion to dismiss (Dkt. 29), motions

for summary and partial summary judgment (Dkt. 146), a motion in

limine to exclude argument that the statements were opinions

(Dkt. 204), and a motion for renewed judgment as a matter of law

(Dkt. 243), and the Court assumes familiarity with those

opinions.

DISCUSSION

I. Injunction

A. Legal Standard

Section 21(d) of the Exchange Act provides that the SEC may

bring an action to enjoin a person “engaged or [] about to

engage” in violations of the Act, and “upon a proper showing a

permanent or temporary injunction or restraining order shall be

granted without bond.” 15 U.S.C. § 78u(d)(1). An injunction is

appropriate where there is, “at a minimum, proof that a person

is engaged in or is about to engage in a substantive violation

of either one of the Acts or of the regulations promulgated

thereunder.” SEC v. Sargent, 329 F.3d 34, 39 (1st Cir. 2003)

(quoting Aaron v. SEC, 446 U.S. 680, 700–01 (1980)). The legal

standard for issuing an injunction is “reasonable likelihood of

recidivism, not an imminent threat of it.” Sargent, 329 F.3d at

39. Courts assess the likelihood of recidivism through several,

non-dispositive factors: “the nature of the violation, including

its egregiousness and its isolated or repeated nature”; “whether

the defendants will, owing to their occupation, be in a position

to violate again”; and “whether the defendants have recognized

the wrongfulness of their conduct.” Id.

The Second Circuit has cautioned that “when defendants are

active in the securities field ‘[a]n injunction is a drastic

remedy, not a mild prophylactic.’” SEC v. Am. Bd. of Trade,

Inc., 751 F.2d 529, 535-36 (2d Cir. 1984) (quoting Aaron, 446

U.S. at 703 (Burger, C.J., concurring)); see also SEC v.

Johnson, 595 F.Supp.2d 40, 45 (D.D.C. 2009) (imposing a

temporary injunction of five years and warning of the

seriousness of a permanent injunction). One court has held that

violations of securities laws are not enough on their own to

satisfy egregiousness. See SEC v. Snyder, No. H-03-04658, 2006

WL 6508273, at *2 (S.D. Tex. Aug. 22, 2006).

Many district courts in this circuit have issued permanent

injunctions for egregious conduct occurring over prolonged

periods of time. For prolonged schemes, see SEC v. Wall, No.

2:19-cv-00139-JHR, 2020 WL 1539919, at *8 (D. Me. Mar. 31,

2020); SEC v. Chan, 465 F. Supp. 3d 18, 38 (D. Mass. 2020); SEC

v. Present, No. 14-cv-14692-LTS, 2018 WL 1701972 at *1 (D. Mass.

Mar. 20, 2018). For repeated conduct, see SEC v. Weed, 315 F.

Supp. 3d 667, 676 (D. Mass. 2018). For egregiously fraudulent

conduct, see SEC v. Cody, No. 16-cv-12510, 2019 WL 6619195 at *4

(D. Mass. Dec. 5, 2019); SEC v. Druffner, 517 F. Supp. 2d 502,

513 (D. Mass. 2007).

B. Parties’ Arguments

The SEC seeks a permanent injunction. The SEC argues that

Defendants’ violations “were deliberately calculated to strike

at the heart of Ligand’s business.” Dkt. 245 at 3–4. In its

view, the fraudulent statements focused on “Ligand’s most

important product (Promacta) and a vital new business

relationship (Viking).” Dkt. 245 at 4. The SEC avers that the

conduct was egregious and repetitive because the jury found that

Lemelson made three separate fraudulent statements, Lemelson

never corrected the statements, and Lemelson never publicly

acknowledged that Voss denied his claim. Moreover, the SEC

contends that not only is Lemelson in a position where he could

violate again, but he likely will violate again.

The Commission bolsters this claim by pointing to what it

describes as Lemelson’s “improper behavior” during litigation

and his “minimizing and mischaracterizing the meaning and import

of the jury verdict.” Id. at 5. The SEC points out that this

Court sanctioned Lemelson $100 per page of leaked material after

Lemelson violated a protective order and leaked 50 pages of

material to the press. The SEC also emphasizes that Lemelson,

through his counsel, threatened a priest, who had provided

allegedly false information about Lemelson’s credentials as a

priest to the Commission, with litigation.

Lemelson opposes, emphasizing that the jury found that the

three discrete statements were not part of a larger scheme and

over seven years have passed since Lemelson made the statements.

Lemelson contends that the violations in the case were not

egregious because he did not cover any of his short position as

to the statements made on July 3 about Viking, and he covered

“less than 6% of his overall position” six hours after his

Benzinga radio interview. Dkt. 260 at 4. Lemelson also argues

that the July 3 statements were about Viking, a company whose

stock Lemelson did not trade, and the SEC did not offer evidence

that Ligand’s stock price was impacted by the Viking statements.

Lemelson next argues that the conduct was not repetitive because

“[t]hree isolated statements out of thousands of pages of

published work and multiple media appearances does not

constitute ‘repeated’ conduct.” Id. at 6. Lemelson further avers

that the Court can be assured that Lemelson will not violate

again because he has not been charged with any securities

violations before or after the present case. He contends that

the SEC’s “improper behavior” justification is unrelated, as

Lemelson was already sanctioned for violating the protective

order and counsel’s letter to a third-party priest cannot be

used as support for the proposition that Lemelson is likely to

engage in future violations. Finally, Lemelson asks that the

Court consider general equity concerns. If the Court issues an

injunction, he emphasizes, the Commission will likely seek to

permanently bar Lemelson from working as an investment advisor.

Lemelson has provided the Court with eleven letters of support

from his investors who want him to stay on as their advisor.

C. Analysis

1. Nature of the Violation

As to the nature of the violation, the jury found that

Lemelson made three different material false statements.

However, he was found not liable for an overarching scheme,

indicating that the SEC was not able to prove that these three

separate statements were connected to a scheme to defraud Ligand

investors. I find that one of the three statements, that Bruce

Voss agreed that Promacta, Ligand’s key product, was going away,

was particularly egregious. The three fraudulent statements were

made on June 19 and July 3. While Lemelson engaged in a campaign

to drive down Ligand’s stock, the material misstatements

occurred over the course of a short time period.

2. Position to Violate Again

Lemelson will be able to violate again, as he continues to

work as an investment adviser and recently started a new fund,

Spruce Peak Fund. Investors will continue to look to his advice

and rely on the truthfulness of his reports.

3. Acknowledgement of Wrongdoing

Finally, Lemelson continues to unabashedly defend his

actions. Lemelson does not recognize the wrongfulness of his

conduct or acknowledge when he was clearly wrong (like the

statements about Viking). His pugilistic approach to the

litigation (e.g., the tweets and the leaked documents) indicates

he has not learned his lesson.

Considering the factors laid out in Sargent and the

precedent above, Lemelson’s conduct merits an injunction, but

his violation was not as severe as in many of the cases where

courts ordered permanent injunctions. A temporary injunction is

more appropriate in this case. The Court sets the injunction for

a period of five years.

II. Civil Penalty

A. Legal Standard

Section 20(d)(2) of the Securities Act, 15 U.S.C.

§ 77t(d)(2), and § 21(d)(3) of the Exchange Act, 15 U.S.C.

§ 78u(d)(3) provide that the civil penalty “shall be determined

by the court in light of the facts and circumstances.” 15 U.S.C.

§§ 77t(d)(2)(A), 78u(d)(3)(B)(i). “The tier determines the

maximum penalty, with the actual amount of the penalty left up

to the discretion of the district court.” SEC v. Kern, 425 F.3d

143, 153 (2d Cir. 2005) (citing 15 U.S.C. § 77t(d)). Tier II

requires “fraud, deceit, manipulation, or deliberate or reckless

disregard of a regulatory requirement.” 15 U.S.C.

§ 77t(d)(2)(B). Tier III requires the fraud elements of Tier II

plus that “such violation directly or indirectly resulted in

substantial losses or created a significant risk of substantial

losses to other persons.” 15 U.S.C. § 77t(d)(2)(C).

Both parties consider the appropriate penalty under the

following factors: “the egregiousness of the violation, the

defendant's willingness or failure to admit wrongdoing, the

isolated or repeated nature of the violations, the degree of

scienter involved, the defendant's cooperation with authorities

or lack thereof, and the defendant's current financial

condition.” SEC v. Esposito, No. 16-cv-10960-ADB, 2018 WL

2012688, at *9 (D. Mass. Apr. 30, 2018) (the “Esposito

factors”).

B. Parties’ Arguments

The SEC argues that Lemelson should be ordered to pay a

third-tier penalty of $656,500. This amount reflects Lemelson’s

pecuniary interest in the approximately $1.3 million of profits

gained by the Amvona Fund. The SEC calculates this amount by

adding Lemelson’s share of the profits based on his 34%

ownership of the assets in the Amvona Fund ($442,000) plus a 25%

performance fee he collected on the remaining profits of

$214,000. The SEC adds that LCM should also pay a third-tier

penalty of $775,000, “the amount authorized at the time of the

offending conduct against entities under Exchange Act Section

21(d)(3)(B)(iii).” Dkt. 245 at 9. The SEC argues that the Court

should impose a separate penalty for LCM “[d]espite the parties’

agreement at trial to focus on Lemelson as a proxy for LCM as to

the fraudulent conduct at issue” because LCM enabled Lemelson to

carry out the fraudulent conduct. Id.

The SEC condemns defendants’ conduct as repetitive and

egregious. Further, it argues that Lemelson has failed to take

responsibility for his misconduct, the conduct involved a high

degree of scienter, and defendants’ fraud created a risk of

significant losses to Ligand investors. The SEC points out that

Lemelson himself took credit for driving down Ligand’s stock,

indicating that three false statements were made with scienter.

He has refused to take responsibility despite the jury’s

verdict. The SEC alleges that he continues to engage in

deceitful practices, citing to a tweet that Lemelson sent out

from three accounts after the jury verdict. The tweet quotes

part of the first line of a Law360 article, saying “A Boston

federal jury on Friday absolved a Greek Orthodox priest of fraud

claims in a U.S. SEC suit alleging he launched a short-and-

distort scheme through his hedge fund . . . .” Dkt. 245 at 11.

The SEC contends that this was an effort to mislead the public

and minimize the seriousness of the jury’s verdict.

Lemelson insists that the Court should impose less than the

$80,000 maximum for a Tier II penalty. Tier III is

inappropriate, Lemelson argues, because the SEC has not shown

there was substantial loss or significant risk of such loss in

the case. Lemelson contends that he never claimed that any

decline in Ligand’s stock price was attributable to the three

statements for which he was found liable. He also calls the

SEC’s social media argument false and hypocritical. Lemelson

“simply retweeted this article—he did not draft its language or

otherwise comment on it.” Dkt 260 at 18-19. Further, Lemelson

calls out the SEC for their own misleading press release after

the trial, entitled “SEC Wins Jury Trial Against Hedge Fund

Adviser Who Ran Manipulative Short Scheme.” Dkt. 260 at 19

(quoting Dkt. 261-34). Finally, Lemelson avers that the Court

should not allow the SEC to “improperly double-dip” with

separate civil monetary penalties for both Lemelson and LCM.

Dkt. 260 at 21.

In reply, the SEC adds the expert report of its expert Dr.

Erin Smith to bolster the argument that Defendants’ fraud

created a risk of investor loss. The SEC contends first that

actual losses are not necessary; and second, even if they were

necessary, their expert demonstrates that investors traded in

reliance on that information on the two days on which Defendants

made their fraudulent statements.

C. Analysis

As an initial matter, Lemelson and LCM should not face

separate civil penalties. Before trial, the parties agreed that

“because LCM was controlled and operated entirely by Fr.

Lemelson, there would be no need for separate evidence to try to

establish liability against both Fr. Lemelson and LCM.” Dkt. 260

at 21. The parties’ earlier agreement undercuts the SEC’s

argument that the entities engaged in distinct conduct for

purposes of a penalty.

In asking for a Tier II violation, Lemelson essentially

concedes “fraud, deceit, manipulation, or deliberate or reckless

disregard of a regulatory requirement.” 15 U.S.C.

§ 77t(d)(2)(B). His fraud is not in question. To enter Tier III,

the SEC must show that his violations caused substantial losses

or created a significant risk of substantial loss to investors.

The SEC attaches Dr. Smith’s expert report and a letter from

Robert H. Fields of Cardinal Capital Management, LLC, who

testified at trial, stating he is “confident the false and

misleading statements Father Lemelson made likely artificially

depressed the price of Ligand’s stock, thereby harming

investors.” Dkt. 268-1. As to the Benzinga interview, Dr.

Smith’s report concludes “that the interview is associated with

a -2.44% abnormal decline in Ligand’s stock price, which is

statistically significant at the 90% confidence level.” Dkt.

266-1 at 13. As to the July report containing the statements

about Viking, she “estimated that Ligand’s stock price declined

by -1.95%, which is statistically significant at the 99%

confidence level.” Dkt. 266-1 at 14. Dr. Smith further found

that, after Newswire distributed Lemelson’s July 3 report about

Viking on July 7, Ligand’s stock price declined by -3.97%,

statistically significant at the 99% confidence level.

While Lemelson focuses on actual losses, the SEC is correct

that a significant risk of substantial loss is enough to qualify

a violation for Tier III penalties. Courts have differed on what

is required to show a significant risk of loss, however. Some

courts have not required concrete evidence that any investors

traded (or were at risk of trading) in reliance on such

statements. See SEC v. Monterosso, 557 F. App'x 917, 929 (11th

Cir. 2014) (holding that a significant risk of substantial loss

to investors exists wherever the fraudulent statements at issue

“would have been important to any reasonable shareholder”); SEC

v. SeeThruEquity, LLC, No. 18 Civ. 10374 (LLS), 2022 WL 171196,

at *2 (S.D.N.Y. Jan. 19, 2022) (“Disseminating such materially

false information into the market created a significant risk of

substantial loss to the investing public.”) (citing SEC v.

Universal Express, Inc., 646 F. Supp. 2d 552, 568 (S.D.N.Y.

2009) (explaining that a defendant’s mere “dissemination of

materially false information create[d] a significant risk of

substantial loss to the investing public”)).

Other courts have refused to infer a “significant risk of

substantial losses” in the absence of proof that such a risk

existed. See SEC v. Madsen, No. 17-CV-8300 (JMF), 2018 WL

5023945, at *4 (S.D.N.Y. Oct. 17, 2018) (“Although all Section

10(b) or Rule 10b-5 frauds could be said to create some ‘risk’

of some ‘harm’ to investors, the Remedies Act reserves third-

tier civil penalties for those frauds that create a significant

risk of substantial losses.”) (internal citations omitted); SEC

v. Eiten, No. No. 11-12185-GAO, 2014 WL 4965102, at *2 (D. Mass.

Sept. 30, 2014) (“The SEC argues that Eiten's false reports

could have resulted in investor losses, but has not demonstrated

any amount of actual losses that were substantial.”); SEC v.

Todt, No. 98 Civ. 3980 (JGK), 2000 WL 223836, at *12 (S.D.N.Y.

Feb. 25, 2000) (refusing to impose a third-tier penalty without

evidence that any investors “ever seriously entertained”

transacting based on the fraud).

Based on the verdict and evidence, I find that at least one

of the statements, the Promacta remark in the Benzinga

interview, would have been extremely important to a reasonable

investor and created a significant risk of substantial loss. A

reasonable investor hearing that a company’s key product is

“going away” would be influenced to sell. Lemelson himself

bragged that he was responsible for Ligand losing $500 million

in market capital. Further, Dr. Smith’s analysis provides

persuasive evidence that investors traded in reliance on all

three statements. Dr. Smith found that the radio interview and

the July 3 report are associated with abnormal declines in

Ligand’s stock price. While the amount of actual loss

attributable to the three false statements over the entire

period of time when Lemelson engaged in his campaign against

Ligand between June and October is unclear, Lemelson’s

violations created a significant risk of substantial losses to

investors. Therefore, a Tier III penalty is appropriate.

A third-tier violation is capped at the greater of “the

gross amount of pecuniary gain to such defendant as a result of

the violation” or $160,000 when the statute is adjusted for

inflation. See 15 U.S.C. § 77t(d)(2)(c); Inflation Adjustments

to the Civil Monetary Penalties Administered by the Securities

and Exchange Commission (as of January 15, 2022), SEC (Jan. 15,

2022), https://www.sec.gov/enforce/civil-penalties-inflation-

adjustments.htm. The SEC proffers that $656,500 is the

appropriate penalty as it represents Lemelson’s pecuniary gain

over the entire short campaign. But the statute requires that

the pecuniary gain be a result of the violation, and the SEC has

not shown that Lemelson’s entire gain is a reasonable

approximation for the amount of money he gained as a result of

his three false statements. Remember, the jury found that

Lemelson was not liable for a short-and-distort scheme, so it is

not correct that the entire short campaign is a proxy for

Lemelson’s violation. The SEC ignores the other negative reports

published at the same time, the volatility of the stock before

and after the events, and their expert’s view on assessing

causal impact. Dr. Smith explains that “stocks react to news

very quickly, typically within five to fifteen minutes of the

announcement,” and “the impact of an event on the stock price

can be measured by the change in the stock price immediately

surrounding the announcement.” Dkt. 266-1 at 11. Looking to the

expert’s intraday event study, the price of Ligand stock fifteen

minutes prior to the radio interview was $66.59. Fifteen minutes

after the interview, the price dropped to $64.47. This drop of -

2.44% is the “abnormal return” that the expert associates with

the statement, though the expert hedges that “[w]hile the price

reaction measured from the close on the previous day to 15

minutes after the statement is statistically significant at the

90% level, it is not statistically significant when I use

alternative estimation windows (1 minute before to 15 minutes

after and 1 minute before to 5 minutes after).” Id. at 13 n.49.

The SEC expert therefore cautions that “this result should be

considered as weak evidence of an effect.” Id. Noticeably absent

from the expert report is an attempt to calculate the pecuniary

gain connected to each false statement.

The SEC has not demonstrated that Lemelson’s misstatements

were reflected in the price months later, as opposed to

“confounding news and trading noise irrelevant to the event.”

Id. at 11. Because the SEC has proposed a penalty based on an

overarching scheme and has not reduced the penalty to reflect

factors outside of the statement, the Court adopts the

statutorily set penalty of $160,000.

III. Disgorgement

A. Parties’ Arguments

The SEC next requests disgorgement of Defendants’ pecuniary

gain from the short campaign, $656,500. The SEC also asks that

the disgorgement be ordered to be joint and several, citing

several recent District of Massachusetts cases that have ordered

the entity and the entity’s sole owner jointly and severally

liable. See Esposito, 2018 WL 2012688, at *9 (ordering managing

director and entity jointly and severally liable for total

disgorgement and prejudgment interest); SEC v. Locke Capital

Mgmt., Inc., 794 F. Supp. 2d 355, 369 (D.R.I. 2011) (holding

entity and entity’s sole owner jointly and severally liable for

disgorgement); SEC v. Tropikgadget FZE, 146 F. Supp. 3d 270, 282

(D. Mass. 2015) (holding defendants jointly and severally liable

for disgorgement amount with prejudgment interest).

Lemelson stresses that the Supreme Court’s recent decision

in Liu v. SEC, 140 S. Ct. 1936 (2020), explains why disgorgement

is inappropriate in this case. Lemelson points out that the Liu

Court held that disgorgement can only be awarded if it benefits

victims. Lemelson notes that the Commission “makes no attempt to

identify any alleged victim or suggest a process to identify

such alleged victims.” Dkt. 260 at 14. Instead, in a footnote,

the SEC said that the Commission could establish a Fair Fund to

determine the feasibility of identifying victims.

B. Analysis

In Liu, the Supreme Court held that “a disgorgement award

that does not exceed a wrongdoer's net profits and is awarded

for victims is equitable relief permissible under § 78u(d)(5).”

Liu, 140 S. Ct. at 1940. Liu first discusses longstanding

equitable principles, where equity courts “limited awards to the

net profits from wrongdoing.” Id. at 1945. While the Court “has

carved out an exception when the ‘entire profit of a business or

undertaking’ results from the wrongful activity,’” aside from

that exception, “courts consistently restricted awards to net

profits from wrongdoing after deducting legitimate expenses.”

Id. at 1945–46 (quoting Root v. Lake Short & M.S. Ry. Co., 105

U.S. 189, 203 (1881)). The Court also clarified the purpose of

disgorgement. Section 78u(d)(5) restricts equitable relief to

“that which ‘may be appropriate or necessary for the benefit of

investors.’” Id. at 1947 (quoting 15 U.S.C. § 78u(d)(5)). The

Court rejected the Government’s position that the “primary

function of depriving wrongdoers of profits is to deny them the

fruits of their ill-gotten gains, not to return the funds to

victims as a kind of restitution.” Id. at 1948. Rather, “the

SEC's equitable, profits-based remedy must do more than simply

benefit the public at large by virtue of depriving a wrongdoer

of ill-gotten gains.” Id.

“The court's power to order disgorgement extends only to

the amount with interest by which the defendant profited from

his wrongdoing.” SEC v. MacDonald, 699 F.2d 47, 54 (1st. Cir

1983) (en banc) (quoting SEC v. Blatt, 583 F.2d 1325, 1335 (5th

Cir. 1978)). In MacDonald, the First Circuit, sitting en banc,

was asked

whether, where [a defendant] fraudulently purchased

company shares “while in possession of material non-

public information [he should be required, in an action

brought by the Commission,] to disgorge the entire

profits he realized from his subsequent sale of those

securities about a year later, rather than limiting

disgorgement to an amount representing the increased

value of the shares at a reasonable time after public

dissemination of the information.”

699 F.2d at 52. The court focused on whether the later profits

were “causally related” to the wrongdoing. Id. at 54. After the

investing public learned of the information and the market

responded, any “subsequent profits” were “purely new matter” and

not subject to disgorgement. Id. at 54-55. The court explained

that “[t]here should be a cut-off date” in cases where “the

sellers have an opportunity to take remedial action.” Id. at 54.

“[I]n order to establish a proper disgorgement amount, ‘the

party seeking disgorgement must distinguish between the legally

and illegally derived profits.’” SEC v. Razmilovic, 738 F.3d 14,

31 (2d Cir. 2013) (quoting CFTC v. British Am. Commodity Options

Corp., 788 F.2d 92, 93 (2d Cir. 1986)). While private

enforcement suits are different from SEC suits, that difference

“does not entirely eliminate the need for proof of a causal

connection between the securities violation and the disgorged

funds.” SEC v. Teo, 746 F.3d 90, 103 (3rd Cir. 2014). This Court

“may exercise its equitable power only over property that is

causally related to the wrongdoing.” SEC v. First City Fin.

Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989). Though disgorgement

“may well be a key to the SEC's efforts to deter others from

violating the securities laws, [it] may not be used punitively.”

Id. The burden initially rests with the SEC to “establish[] a

reasonable approximation of the profits causally related to the

fraud.” Razmilovic, 738 F.3d at 31.

In light of the volatility of the stock price, the jury’s

lack of a finding of scheme liability, and the SEC’s lack of

adequate discussion of victims, the Court will not order

disgorgement in this case. The Supreme Court recently made clear

that disgorgement is a tool intended to benefit investors, not

to further punish the defendant. See Liu, 140 S. Ct. at 1948.

While the SEC seeks to argue that stock volatility and

confounding events are irrelevant, it is difficult to see how

Lemelson is responsible for the entirety of the drop in Ligand’s

stock price between June and October 2014. Without scheme

liability, it seems that the defendant’s “wrongdoing” would be

more properly limited to profits that resulted from his three

specific false statements. Moreover, the investing public had

access to information about at least two of the statements—that

Viking was audited and that it would have third parties conduct

preclinical trials—and therefore could take remedial action. As

discussed above, the SEC has not presented a reasonable

approximation of the pecuniary gain from these three statements.

Moreover, the SEC has not provided any evidence that it could

identify victims and has left open whether it is feasible to

create a Fair Fund. See Dkt. 245 at 13 n.3 (“The Commission

desires to distribute collected civil penalties, disgorgement,

and prejudgment interest to affected investors via a Fair Fund

established pursuant to Section 308(a) of the Sarbanes-Oxley

Act, if feasible. Once the Defendants pay the ordered

disgorgement and penalties, the Commission will determine the

feasibility of a distribution and petition this Court to

establish the Fair Fund.”). The Court declines to impose

disgorgement; therefore, there is no need to discuss prejudgment

interest.

ORDER

For the reasons stated above, the Court orders the

following final judgment:

Defendants are enjoined from violating Section 10(b) of the

Exchange Act and Rule 10b-5 for a period of five years, and

Lemelson is ordered to pay a Tier III civil penalty in the

amount of $160,000 forthwith.

SO ORDERED.

/s/ PATTI B. SARIS

Hon. Patti B. Saris

United States District Judge