# Securities and Exchange Commission v. Lemelson

> District Court, D. Massachusetts · March 30, 2022

URL: https://www.frixlaw.com/law-library/cases/10200174

## Case

- **Court:** District Court, D. Massachusetts
- **Decided:** March 30, 2022
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10200174

## How later opinions describe it (automated extraction)

- 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”
- holding defendants jointly and severally liable for disgorgement amount with prejudgment interest
- explaining that a defendant’s mere “dissemination of materially false information create[d] a significant risk of substantial loss to the investing public”
- holding entity and entity’s sole owner jointly and severally liable for disgorgement

## Opinion text

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10200174. Public record. Not legal advice.