stating that, as a practical matter, the public interest favors a plaintiff after it can demonstrate both a reasonable likelihood of success on the merits and irreparable injury
How later courts described this case
- stating that, as a practical matter, the public interest favors a plaintiff after it can demonstrate both a reasonable likelihood of success on the merits and irreparable injury
- “Generally, the moving party must establish the first two factors and only if these gateway factors are established does the district court consider the remaining two factors.”
Written by the judges who cited it.
The opinion
PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
No. 23-2776
____________
SECURITIES & EXCHANGE COMMISSION
v.
DALE B. CHAPPELL; BLACK HORSE CAPITAL LP;
BLACK HORSE CAPITAL MASTER FUND LTD;
CHEVAL HOLDINGS LTD;
MARY E. CHAPPELL, Relief Defendant;
CANDACE M. DURAN, Relief Defendant
Dale B. Chappell, Black Horse Capital LP, Black Horse
Capital Master
Fund Ltd, Cheval Holdings Ltd,
Appellants
_______________
On Appeal from the United States District Court
For the District of New Jersey
(D.C. No. 2-23-cv-03769)
District Judge: Honorable John M. Vazquez
_______________
Argued
January 17, 2024
Before: JORDAN, BIBAS, and AMBRO, Circuit Judges
(Filed: July 9, 2024)
_______________
Alisa Benintendi
Taeler Lanser
Marc R. Rosen [ARGUED]
Kleinberg Kaplan Wolff & Cohen
500 Fifth Avenue
New York, NY 10110
Counsel for Appellants
Rachel McKenzie
Archith Ramkumar [ARGUED]
United States Securities & Exchange Commission
100 F Street NE
Washington, DC 20549
Counsel for Appellee
_______________
OPINION OF THE COURT
_______________
JORDAN, Circuit Judge.
I. BACKGROUND
The Securities and Exchange Commission brought a
civil enforcement action against Dale Chappell and three of his
investment entities for insider trading in violation of various
federal securities laws. In the District Court, the SEC sought
2
and obtained a preliminary injunction to freeze Chappell’s
assets. Chappell asks us to vacate that injunction, but, because
the District Court appropriately exercised its discretion in
imposing it, we will affirm.
A. Factual Background
1. Chappell and the Black Horse Funds
Chappell relinquished his United States citizenship in
2013 and is now a citizen of Malta and a legal resident of
Switzerland. He serves as the Chief Scientific Officer and a
member of the board of directors of Humanigen, Inc.
(“Humanigen” or the “Company”), a biopharmaceutical
company. With his wife, he owns eighty-eight percent of
Black Horse Capital LP, Black Horse Capital Master Fund
Ltd., and Cheval Holdings, Ltd. (collectively, the “Black Horse
Funds”), 1 investment funds that, together, are Humanigen’s
largest shareholder. Chappell has complete control over the
Black Horse Funds’ investment portfolio, which is “heavily
concentrated” in Humanigen stock, so much so that the stock
“represent[s] the overwhelming majority of the [Funds’]
holdings[.]” (J.A. at 662.)
2. Humanigen’s Clinical Study for Lenz
Shortly following the onset of the COVID-19
pandemic, Humanigen sought to obtain emergency use
authorization (“EUA”) from the United States Food and Drug
Administration (the “FDA” or the “Agency”) to commercialize
1
The remaining twelve percent of the Black Horse
Funds is owned by twelve other investors.
3
a drug called lenzilumab, or “Lenz,” to treat inflammation in
COVID-19 patients. (J.A. at 656.) The Company had
historically “incurred significant net losses and negative
operating cash flows[,]” and Lenz was Humanigen’s only
product with short-term revenue potential. (J.A. at 143.) With
commercialization of Lenz as the goal, in May of 2020,
Humanigen commenced a clinical trial with 300 patients. 2
A few months later, Humanigen sought feedback from
the FDA regarding the clinical trial’s sufficiency to support an
EUA. The FDA responded with concern that the clinical trial
was too small, and it recommended that Humanigen “increase
the sample size of [its] current study” or, “[a]lternatively, …
consider initiating and completing additional studies of an
appropriate size prior to submission of [its] EUA request
package.” (J.A. at 355-56.) Chappell asserts that, in response
to the FDA’s feedback, Humanigen increased the size of its
study to approximately 515 patients.
3. The Black Horse Funds’ March Trading
Plan
In March of 2020, Humanigen stock was trading at
$1.65 per share in the over-the-counter market. 3 The company
The study was called the “LIVE-AIR” study, and
2
Humanigen characterized it as a “Phase Three” study. (J.A. at
659.)
3
Over-the-counter securities “are traded without being
listed on an exchange.” Chris B. Murphy, Over-the-Counter
(OTC) Markets: Trading and Securities, Investopedia (Mar. 5,
4
held an initial public offering (“IPO”) on the NASDAQ stock
exchange in September of 2020, and, by January of 2021,
Humanigen stock had risen to $20.64 per share. By that time,
the Black Horse Funds owned about 14 million shares of
Humanigen stock. As a result, Chappell had many tens of
millions of dollars in unrealized gains from the Black Horse
Funds’ investment in Humanigen stock.
Because of a lock-up period following the IPO, 4 the first
trading window in which Chappell could sell some of his
Humanigen shares was in March of 2021. He accordingly set
up a 10b5-1 trading plan 5 for the Black Horse Funds for the
2024), https://www.investopedia.com/terms/o/otc.asp
[https://perma.cc/3KLK-2JEH].
4
An IPO lock-up period is “a period of time after a
company has gone public when major shareholders are
prohibited from selling their shares. During the IPO lock-up[,]
company insiders and early investors cannot sell their shares,
helping to ensure an orderly IPO and not flood the market with
additional shares for sale.” Adam Hayes, What’s an IPO
Lockup? Definition, Purpose, Expiration Strategies,
Investopedia (Feb. 23, 2024),
https://www.investopedia.com/terms/i/ipolockup.asp
[https://perma.cc/56WG-FHAA].
5
More accurately, Chappell set up a 10b5-1 trading plan
for each of the three Black Horse Funds. Because the plans
function, in effect, as one plan, we refer to them in the singular.
“Rule 10b5-1 allows insiders to sell company stock by
setting up a predetermined plan that specifies in advance the
share price, amount, and transaction date.” Adam Hayes, Rule
5
March trading window. The plan set limit prices that were
higher than the market price of Humanigen stock at the time he
entered the trading plan, so the Humanigen shares held by the
Black Horse Funds would be sold only if the stock continued
to appreciate in value and reach those limit prices. 6 During the
dates that Chappell’s March trading plan was in effect,
however, Humanigen’s stock price never reached those levels,
so the trading plan did not trigger any sales of the stock. If the
limit prices had been met, the Black Horse Funds could have
sold approximately 9% of their holdings in Humanigen. 7
10b5-1 Definition, How It Works, SEC Requirements,
Investopedia (Feb. 27, 2023),
https://www.investopedia.com/terms/r/rule-10b5-1.asp
[https://perma.cc/FHJ2-X3LE]. These plans are created by
corporate insiders to protect against insider trading allegations.
Id.
Humanigen has an insider trading policy that prohibits
employees from trading its securities if they are aware of
material nonpublic information relating to the company.
6
Specifically, the plan contained an initial limit price of
$25, with a second limit price of $35, meaning that the Black
Horse Funds would not execute sales of Humanigen stock
unless its market price was at least $25, with additional sales
being triggered if the stock was at least $35. Chappell asserts
that the prices in the March trading plan were set in anticipation
of positive results from Lenz’s clinical trial.
7
Apparently, Chappell had been communicating with
multiple brokers to create the trading plan. After executing the
March trading plan, Chappell responded via email to another
broker who had inquired about getting a plan set up, saying,
6
4. The FDA’s Feedback on Humanigen’s
Clinical Study
In March of 2021, after Chappell entered his trading
plan, Humanigen reported the initial results of its clinical trial
and scheduled a pre-EUA meeting with the FDA to discuss
them. In advance of the meeting, the FDA sent preliminary
comments, stating that, “while available data for [Lenz] are
promising, the criteria for issuance of an EUA are unlikely to
be met[.]” (J.A. at 768.) It explained that it had “significant
concerns that negatively impact the ability to rely on this single
trial to support the potential benefit of [Lenz]” and
recommended that Humanigen “conduct an additional trial(s)
to inform the potential benefit and risk of [its] product[.]” (J.A.
at 767-68.)
At the pre-EUA meeting, on April 14, the FDA asked
Humanigen if it was going to conduct an additional
confirmatory trial. The Company responded that it had an
ongoing “ACTIV-5” trial with the National Institutes of Health
(the “NIH”) that included a Lenz component, but that it “had
no current plans for further clinical trials.” (J.A. at 344.) The
FDA replied that the NIH ACTIV-5 trial was “relatively small”
and “likely not sufficient to serve as a confirmatory trial[.]”
(J.A. at 344.) The Agency “strongly recommended that
[Humanigen] conduct an additional confirmatory study and
discouraged submission of an EUA at [that] time.” (J.A. at
344.)
“We are only selling up to 9% of our [Humanigen] stock with
the current 10b‐5 plan so there is a lot more to come.” (J.A. at
759.)
7
5. Humanigen’s Response to the FDA’s
Feedback
Three days after the meeting, Humanigen’s CFO, who
served as the company’s securities compliance officer, wrote
an email to Chappell and Humanigen’s CEO, stating, in
relevant part:
We need to disclose the results of the FDA
meeting. I think it is fairly clear that the data we
currently have as discussed is not adequate for
EUA submission. The minutes [from the
meeting] will not change that outcome. This is
negative news and we have a duty to update the
market.
(J.A. at 1382.)
A few days later, Humanigen held a board meeting to
discuss the FDA’s feedback. 8 At the meeting, Humanigen’s
CEO explained that the FDA “was likely to request the
Company to initiate an additional confirmatory study[,]” but
that the Company had received new data from the trial a few
days after the FDA meeting and the Agency had not had an
opportunity to consider it. (J.A. at 838.) Right after the
meeting, Chappell sent an email to the CEO expressing his
belief that Humanigen was onto “something very meaningful”
(J.A. at 784), since the new data showed that certain
untreatable patients “were skewing the entire data set”
(Opening Br. at 16). Ultimately, the board decided not to
immediately disclose the details of the FDA meeting to the
8
Humanigen’s CFO attended the board meeting.
8
public “given the incomplete nature of the data and [because]
further data would be furnished to [the] FDA in the near term
that may be more compelling.” (J.A. at 838.)
Despite the FDA’s previous discouragements,
Humanigen notified the Agency via email on May 4, 2021, that
it was planning to submit an EUA for Lenz “within
approximately a month[,]” with “additional analyses” and “a
more complete data package[.]” (J.A. at 368.) On May 13, the
FDA emailed Humanigen a post-meeting comment that
acknowledged its May 4 email and “reiterate[d] [its] concerns
conveyed during the [pre-EUA] meeting …, as well as [its]
feedback that … [Lenz] is unlikely sufficient to satisfy the
criteria for issuance of an EUA.” (J.A. at 344.) “In lieu of an
EUA request, [the FDA] strongly recommend[ed] that
[Humanigen] submit a meeting request to further discuss [its]
continued development program, … includ[ing] details
regarding additional confirmatory clinical trial(s).” (J.A. at
344.)
On the same day, Humanigen submitted a quarterly
financial report to the SEC that disclosed the FDA meeting.
The report informed investors that it planned to submit an EUA
application for Lenz at the end of May of 2021, mentioned that
the FDA requested additional information, and cautioned that
“[t]here can be no assurance that the data … will be sufficient
for an EUA or that the FDA will not require additional
information in order to grant an EUA.” (J.A. at 902.) The
report did not mention the FDA’s specific feedback that
Humanigen should conduct an additional confirmatory study
before submitting an EUA application.
9
6. The Black Horse Funds’ June Trading
Plan
Less than two hours after Humanigen received the
FDA’s email reiterating its concerns about Lenz’s possibility
of receiving an EUA, Chappell contacted his stockbroker about
setting up a new 10b5-1 trading plan to sell some of the Black
Horse Funds’ shares of Humanigen stock. The plan was
different from the one that he had set up for the March trading
window. This time, it called for a limit price below the then-
market value of the stock because Chappell wanted “to ensure”
that he would be able to sell some of his shares. (J.A. at 540.)
In other words, Chappell was willing to sell his shares at a
discount to their market value. He was unable to execute his
trading plan, however, because Humanigen did not have an
open trading window for executives at that time.
Nevertheless, Chappell later sold 475,000 shares of
Humanigen stock for approximately $8.8 million, without a
trading plan in effect. He alleges that the sales were “intended
to be a first step towards satisfying [his] investors’ requests to
realize paper gains and hedge the outsized exposure to
Humanigen” and “to provide the amount of capital [that he]
needed to meet an upcoming mortgage payment.” (Opening
Br. at 19.)
A few weeks later, Humanigen opened a trading
window in June of 2021, and Chappell executed a new trading
plan for the Black Horse Funds that again called for a limit
price below the Company’s stock price at the time. The plan
was approved by Humanigen’s CFO, although the record does
not indicate on what basis the plan was approved or what
representations Chappell made to the CFO before he
10
authorized it. Because Humanigen stock was trading above the
plan’s limit price, Chappell was able to quickly offload a
substantial amount of his Humanigen stock. From June
through August of 2021, he sold, in total, 3,835,000 shares of
Humanigen stock for net proceeds of approximately $68
million. That was approximately 25% of the Black Horse
Funds’ shares of Humanigen stock. 9
9
Prior to the June trading plan, Chappell had attempted
to execute a “no-cost collar” strategy with the Humanigen
stock under his control. A no-cost-collar “is used to hedge
against volatility” and is a stock options strategy “implemented
after your long position in a stock experiences substantial
gains.” James Chen, Zero Cost Collar: Definition and
Example, Investopedia (May 20, 2023),
https://www.investopedia.com/terms/z/zerocostcollar.asp
[https://perma.cc/6EH6-E7GD]. Chappell’s proposed
arrangement, which involved buying puts at $17 per share and
selling calls at $30 per share, worked as follows: If
Humanigen’s stock price rose to $30 or higher, the Black Horse
Funds would have to sell shares to a buyer at $30 if the buyer
exercised the call options; if the stock fell below $17, the Black
Horse Funds could exercise their put options to sell their shares
to a buyer for $17. Thus, by using a no-cost collar, Chappell
would have limited both his upside gains and downside losses.
Like the June trading plan, the no-cost collar would have
applied to roughly 25% of the Black Horse Funds’ shares in
Humanigen. The no cost-collar was too difficult to implement
over the short time horizon, so Chappell abandoned it and,
instead, executed the June trading plan.
11
Shortly after the trading plan was implemented, a
former Humanigen board member emailed Chappell asking
him why he sold some of his Humanigen stock. Chappell
responded that he sold the shares to fulfill his fiduciary duties
and because of unknowns related to the COVID-19
pandemic. 10 (J.A. at 1134.) Notably absent from Chappell’s
response was any mention of the FDA’s feedback.
7. The FDA’s Denial of the Lenz EUA
Application
On June 2, 2021, Humanigen submitted its EUA
application for Lenz. 11 Instead of conducting a new clinical
study before submitting the application, as the FDA had
recommended, Humanigen had merely begun discussions with
the NIH to expand the existing ACTIV-5 study. A week later,
the FDA sent Humanigen a request for information about the
expanded ACTIV-5 trial study elements, and cautioned that the
“current study elements … would not be acceptable as a
confirmatory study[.]” (J.A. at 1147.) Humanigen responded
10
Chappell alleges that, in February of 2021, a minority
investor in the Black Horse Funds advised him to sell some of
the Humanigen stock to cash in on some of the gains. He also
asserts that, in March of 2021, he spoke with another investor
about “reducing the fund’s position in Humanigen.” (J.A. at
664.)
11
Humanigen issued a press release on May 28 stating
that it had submitted an EUA application for Lenz. But
communications from the FDA to Humanigen, including the
FDA’s letter denying Humanigen’s EUA application, indicate
that the application was submitted on June 2.
12
to the FDA by saying that “discussions in relation to the
expansion of the ACTIV-5 trial … to a confirmatory study are
ongoing.” (J.A. at 1147.) In the end, the FDA never authorized
Humanigen to use the NIH ACTIV-5 study as an additional
confirmatory study.
Instead, the FDA denied Humanigen’s EUA
authorization request in September of 2021, stating that,
“based on the totality of scientific evidence available, … we
are unable to reasonably conclude that [Lenz] may be effective
for the treatment of COVID-19 as proposed.” 12 (J.A. at 622.)
12
The FDA provided the following comment in its letter
denying Humanigen’s EUA request:
Your EUA request is based primarily on data
from a randomized, double-blind, placebo-
controlled trial of [Lenz] for the treatment of
hospitalized patients with COVID-19. We note
that results for the primary endpoint, ventilator-
free survival by Day 28, were not statistically
significant using the pre-specified primary
analysis method. While an alternative analysis
indicated nominal significance for the primary
endpoint, there are limitations to interpreting and
relying on the results of post-hoc analyses.
Given the primary endpoint failed to achieve
statistical significance based on the primary
analysis, any results of the secondary endpoints
would be considered exploratory.
Notwithstanding, the treatment comparisons for
all key secondary endpoints failed to exclude the
null value and do not provide support for
13
Humanigen publicly announced the denial, causing its stock
price to fall nearly 50%. According to the SEC’s calculations,
Chappell avoided about $38 million in losses by selling his
shares prior to the public announcement disclosing the FDA’s
denial of an EUA for Lenz.
B. Procedural History
In July of 2023, the SEC filed a complaint in the District
Court alleging that Chappell and the Black Horse Funds 13
engaged in insider trading in violation of Securities Act Section
17(a), Exchange Act Section 10(b), and Exchange Act Rule
10b-5. 14 It alleged that Chappell traded securities on the basis
efficacy. The safety database for [Lenz] in
COVID-19 patients was also limited.
(J.A. at 622-23.) See infra note 27 for a further
discussion of this comment.
13
From this point, for simplicity, Appellants Chappell
and the Black Horse Funds will be referred to collectively as
“Chappell,” unless there is a need to distinguish them.
14
The relevant text of these statutes and rule are as
follows:
Section 17(a) of the Securities Act of 1933 makes it
“unlawful for any person in the offer or sale of any securities
… to employ any device, scheme, or artifice to defraud[.]” 15
U.S.C. § 77q(a).
Section 10(b) of the Exchange Act of 1934 makes it
unlawful for any person to “use or employ, in connection with
the purchase or sale of any security registered on a national
14
of material nonpublic information – namely, the FDA feedback
that Humanigen had received about Lenz being unlikely to
qualify for an EUA unless the Company performed an
additional confirmatory study. The SEC sought injunctive
relief, disgorgement of ill-gotten gains, interest, civil penalties,
and an order that Chappell be barred from serving as an officer
or director of any publicly traded company.
In addition, it sought and obtained an ex parte temporary
restraining order (“TRO”) freezing all of Chappell’s assets. In
its order granting the TRO, the District Court found that, “[f]or
purposes of freezing assets, the SEC has established a
likelihood of success on the merits or that an inference can be
drawn that the party has violated the federal securities laws”
and that “[t]here is good cause to believe that, unless funds and
assets are frozen … [Chappell] will dissipate, conceal, or
transfer from the jurisdiction of this Court assets that could be
subject to an order directing disgorgement or the payment of
civil money penalties in this action.” (J.A. at 2.)
Later, the District Court held an expedited hearing on
whether it should convert the TRO to a preliminary
securities exchange[,] … any manipulative or deceptive device
or contrivance[.]” 15 U.S.C. § 78j(b).
Rule 10b-5 provides that manipulative devices or
contrivances include “the purchase or sale of a security of any
issuer, on the basis of material nonpublic information about
that security or issuer, in breach of a duty of trust or confidence
that is owed … to the issuer of that security or the shareholders
of that issuer[.]” 17 C.F.R. § 240.10b5-1(a).
15
injunction. 15 During the hearing, the Court repeated that, for
there to be injunctive relief, “the SEC must show either a
likelihood of success on the merits or that an inference can be
drawn that a party has violated the federal securities laws.”
(J.A. at 18.) The SEC emphasized that there was “a lower bar
here than a traditional preliminary injunction” because all that
needed to be shown was “an inference … that there was a
violation of the securities law[.]” (J.A. at 20.) After hearing
the parties’ arguments, the Court found that “the SEC has
certainly met that there’s a likelihood of success” that Chappell
violated the insider trading laws “and if not[,] at minimum they
have showed an inference that can be drawn” that he violated
them. (J.A. at 80.) The Court then converted the TRO to a
preliminary injunction, the terms of which mirrored the TRO.
Initially, the asset-freeze component of the preliminary
injunction applied to all of Chappell’s assets, “with no
modifications or carve-outs[.]” 16 (J.A. at 14.) Prior to the
hearing, Chappell had requested a monthly carveout that
included $632,000 for rent and $7,900 for luxury vehicles. At
the hearing, the Court observed that Chappell was living “like
royalty,” and it denied his carveout request, without prejudice.
(J.A. at 82.) It told Chappell to “come back with more
reasonable numbers[.]” (J.A. at 82-83.)
15
According to the SEC, Chappell refused to be
deposed before the hearing and also refused to provide all of
the documents that had been requested.
16
Approximately $50 million of Chappell’s assets are
frozen.
16
Later, Chappell filed a motion to request an updated
living expenses carveout, which included his Humanigen
salary, or its equivalent, of $5,637.50 every two weeks. The
SEC consented to that carveout, which the Court granted. In
addition, Chappell and the SEC agreed to have the Court
appoint a receiver to manage Chappell’s assets during the
pendency of the case. Chappell has timely appealed the
preliminary injunction.
II. DISCUSSION 17
We first consider the standard of proof required for
SEC-initiated preliminary injunctions, including asset freezes,
and then turn to the District Court’s conclusion that Chappell
violated insider trading laws. Lastly, we assess whether the
other preliminary injunction factors support the injunction that
was imposed.
17
The District Court had jurisdiction under 15 U.S.C.
§§ 77t(b), 77v(a), 78u(d), 78u(e), 78u-1, and 78aa. We have
jurisdiction pursuant to 28 U.S.C. § 1292(a)(1). “We employ
a tripartite standard of review for … preliminary injunctions.
We review the District Court’s findings of fact for clear error.
Legal conclusions are assessed de novo. The ultimate decision
to grant or deny the injunction is reviewed for abuse of
discretion.” Ramsay v. Nat’l Bd. of Med. Examiners, 968 F.3d
251, 256 n.5 (3d Cir. 2020).
17
A. The Traditional Preliminary Injunction
Standard of Review Applies to SEC-Initiated
Preliminary Injunctions.
“Preliminary injunctive relief is an extraordinary
remedy, which should be granted only in limited
circumstances.” Ferring Pharms., Inc. v. Watson Pharms.,
Inc., 765 F.3d 205, 210 (3d Cir. 2014) (internal quotation
marks omitted). Under the familiar standard of proof, a party
“seeking a preliminary injunction must establish that [it] is
likely to succeed on the merits, that [it] is likely to suffer
irreparable harm in the absence of preliminary relief, that the
balance of equities tips in [its] favor, and that an injunction is
in the public interest.” Winter v. Nat. Res. Def. Council, Inc.,
555 U.S. 7, 20 (2008). “Generally, the moving party must
establish the first two factors and only if these gateway factors
are established does the district court consider the remaining
two factors.” Greater Phil. Chamber of Com. v. City of Phil.,
949 F.3d 116, 133 (3d Cir. 2020) (internal quotation marks
omitted). If the gateway factors are met, “[t]he court then
determines in its sound discretion if all four factors, taken
together, balance in favor of granting the requested preliminary
relief.” Id. (internal quotation marks omitted).
Despite the well-established four-factor preliminary
injunction test, the District Court instead employed a test that
the Second Circuit uses for SEC-initiated asset freezes. As
discussed further herein, that test considers only whether the
agency is likely to succeed on its securities violation claims; it
does not consider the irreparable harm, balancing of the
equities, or public interest elements of the generally applicable
preliminary injunction test. Smith v. SEC, 653 F.3d 121, 127-
28 (2d Cir. 2011) (“In this jurisdiction, injunctions sought by
18
the SEC do not require a showing of irreparable harm or the
unavailability of remedies at law. Rather, the SEC need only
make a substantial showing of likelihood of success as to both
a current violation and the risk of repetition.” (internal
quotation marks and citation omitted)). In addition, the Second
Circuit, when deciding to impose an asset freeze, reduces the
level of proof needed to satisfy the likelihood-of-success
prong. The SEC needs to show only that an inference can be
drawn that a defendant violated the federal securities laws. Id.
at 128. (“Where an asset freeze is involved, the SEC must show
either a likelihood of success on the merits, or that an inference
can be drawn that the party has violated the federal securities
laws.” (emphasis added) (internal quotation marks omitted)).
We take a different path. District courts in this Circuit
must apply the normal four-factor preliminary injunction test
when considering the SEC’s application for a preliminary
injunction.
1. All Four Factors of the Preliminary
Injunction Test Apply in SEC Cases.
The Securities Act and the Securities Exchange Act
provide the SEC statutory bases to move for an injunction
when it appears that a party has violated (or will violate)
federal securities laws:
Whenever it shall appear to the [SEC] that any
person is engaged or about to engage in any acts
or practices which constitute or will constitute a
violation of the provisions of this subchapter …
the [SEC] may, in its discretion, bring an action
in any district court of the United States … to
19
enjoin such acts or practices, and upon a proper
showing, a permanent or temporary injunction or
restraining order shall be granted[.]
15 U.S.C. § 77t(b) (the Securities Act); 15 U.S.C. § 78u(d)(1)
(similar language in the Securities Exchange Act). 18 Because
of those statutory bases, the Second Circuit does not require
district courts to consider all of the traditional preliminary
injunction factors before granting such an injunction. See SEC
v. Unifund SAL, 910 F.2d 1028, 1037 (2d Cir. 1990) (“Since
the SEC, in discharging its statutory responsibilities, is relieved
of the burden of showing a risk of irreparable injury so that it
may secure a preliminary injunction more easily than a private
litigant, we should not add to its burden on the merits.”
(citation omitted)). Rather, it requires the SEC to show only
that there is a likelihood of success that a court will find that a
18
The Securities Exchange Act provides, in relevant
part:
Whenever it shall appear to the [SEC] that any
person is engaged or is about to engage in acts or
practices constituting a violation of any
provision of this chapter, … it may in its
discretion bring an action in the proper district
court of the United States … to enjoin such acts
or practices, and upon a proper showing a
permanent or temporary injunction or restraining
order shall be granted[.]
15 U.S.C. § 78u(d)(1).
20
securities violation has occurred (or will occur) and risk of
repetition before it grants a preliminary injunction. 19 Id.
Controlling and well-reasoned precedent compels us to
forego the Second Circuit’s approach. In Weinberger v.
Romero-Barcelo, the Supreme Court clarified when it is
appropriate for a statutorily-authorized injunction to displace
traditional principles governing injunctive relief. 456 U.S. 305
(1982). The Court acknowledged that “Congress may
intervene and guide or control the exercise of the courts’
discretion” in issuing an injunction, but the Court instructed
that we should not “lightly assume that Congress has intended
to depart from established [equitable] principles.” Id. at 313.
19
The Second Circuit does, however, require a showing
of irreparable harm for other statutorily-authorized injunctions.
See Salinger v. Colting, 607 F.3d 68, 79 (2d Cir. 2010)
(overruling its previous precedent that assumed irreparable
harm in the copyright context); Town of Huntington v. Marsh,
884 F.2d 648, 651 (2d Cir. 1989) (explaining that injunctive
relief does not follow automatically upon a finding of statutory
violations, including environmental violations).
The First Circuit has rejected the Second Circuit’s
approach for SEC-initiated injunctions. SEC v. Fife, 311 F.3d
1, 8 (1st Cir. 2002) (“Unlike the Second Circuit, we have not
removed irreparable harm from the preliminary injunction
inquiry in SEC preliminary injunction actions.”). And the
Seventh Circuit has reserved decision on whether it agrees with
the Second Circuit. SEC v. Cherif, 933 F.2d 403, 408 (7th Cir.
1991) (“We note that the Second Circuit has altered the
standard for injunctions requested by the SEC .… Because the
parties have not argued about the propriety of such a
modification, we leave the question for another day.”).
21
It then declared that “the comprehensiveness of this equitable
jurisdiction is not to be denied or limited in the absence of a
clear and valid legislative command.” Id. (emphasis added);
see also Hecht Co. v. Bowles, 321 U.S. 321, 329 (1944) (“We
cannot but think that, if Congress had intended to make such a
drastic departure from the traditions of equity practice, an
unequivocal statement of its purpose would have been made.”).
The Court explained that, “[u]nless a statute in so many words,
or by a necessary and inescapable inference, restricts the
court’s jurisdiction in equity, the full scope of that jurisdiction
is to be recognized and applied.” Romero-Barcelo, 456 U.S.
at 313. In sum, courts must “construe the statute at issue in
favor of that interpretation which affords a full opportunity for
equity courts to treat enforcement proceedings … in
accordance with their traditional practices, as conditioned by
the necessities of the public interest which Congress has sought
to protect.” 20 Id. at 320 (alteration in original) (internal
20
After Romero-Barcelo, the D.C. Circuit has rejected
the view that injunctions authorized by statute automatically
replace traditional equitable standards, explaining that “[s]ome
cases antedating Romero-Barcelo took the view that mere
statutory authorization of injunctive relief displaced equitable
standards[.] … But such cases seem outmoded by Romero-
Barcelo’s view that displacement of the usual equitable
standards requires a clear and valid legislative command.”
United States v. Microsoft Corp., 147 F.3d 935, 944 (D.C. Cir.
1998) (internal quotation marks omitted).
Nevertheless, the Eighth Circuit has said that “[i]t is a
well-established rule that where Congress expressly provides
for injunctive relief to prevent violations of a statute, a plaintiff
does not need to demonstrate irreparable harm to secure an
injunction.” Burlington N. R. Co. v. Bair, 957 F.2d 599, 601
22
quotation marks omitted). This approach was recently taken in
Starbucks Corp. v. McKinney, with the Supreme Court
eschewing a lower standard for injunctions sought by the
National Labor Relations Board and reiterating that, “absent a
clear command from Congress, courts must adhere to the
traditional four-factor test.” No. 23-367, --- S. Ct. ----, 2024
WL 2964141, at *4 (June 13, 2024).
In SEC v. Gentile, we analyzed at length whether the
text of the injunction provision in the Securities Exchange Act,
15 U.S.C. § 78u(d)(1), satisfied Romero-Barcelo’s “clear
statement” rule such that it would require us to depart from
traditional equitable principles. 939 F.3d 549, 555-58 (3d Cir.
2019). We explained that “[i]nnumerable acts of Congress
explicitly provide for injunctions, and courts must account for
the policy judgments exemplified by those statutes when
exercising their equitable discretion.” Id. at 555-56. “But
unless Congress clearly states an intention to the contrary,
statutory injunctions are governed by the same established
principles of equity that have developed over centuries of
practice.” Id. at 556 (internal quotation marks omitted).
(8th Cir. 1992). It reasoned that, “[i]n such situations, it is not
the role of the courts to balance the equities between the
parties.” Id. Rather, “[t]he controlling issue is whether
Congress has already balanced the equities and has determined
that, as a matter of public policy, an injunction should issue
where the defendant is engaged in, or is about to engage in, any
activity which the statute prohibits.” Id. at 601-02. “The
proper role of the courts is simply to determine whether a
violation of the statute has or is about to occur.” Id. at 602.
23
We specifically discussed the irreparable harm
requirement, saying that “the most basic rule of preventive
injunctive relief [is] that the plaintiff must show a cognizable
risk of future harm.” Id. We went on to explain that, “[b]esides
being an element of Article III standing for prospective relief,
the need to show risk of harm is also a traditional equitable
requirement that applies to enforcement agencies pursuing
statutory injunctions” and that “Congress must provide a clear
statement to substantially depart from traditional equitable
principles like that one.” Id. at 556-57.
Applying those principles, “[w]e perceive[d] no such
intent in the text of § 78u(d)(1)[, i.e., the relevant section of the
Securities Exchange Act,]” to depart from traditional equitable
principles. Id. at 557. We emphasized, rather, that § 78u(d)(1)
did not show “an intent – let alone a clear intent – that
injunctions should issue automatically on a finding of past
violations or without a proper showing of the likelihood of
future harm [because it] uses open-ended language that
suggests traditional equitable discretion.” Id. In sum, “absent
much clearer language than is found in the Exchange Act, the
entitlement of a plaintiff to an injunction thereunder remains
subject to principles of equitable discretion.” Id. (brackets
omitted).
Accordingly, district courts in this Circuit must apply
the traditional four-factor preliminary injunction test, rather
than the Second Circuit’s modified test, before issuing a
preliminary injunction sought by the SEC. 21
21
The language in the injunction provision in the
Securities Act, 15 U.S.C. § 77t(b), has substantially the same
language as the injunction provision in the Securities Exchange
24
2. The Traditional Likelihood-of-Success
Standard Applies to Asset Freezes.
An asset freeze is a type of preliminary injunction.
Deckert v. Indep. Shares Corp., 311 U.S. 282, 290 (1940). It
is “designed to preserve the status quo by preventing the
dissipation and diversion of assets.” SEC v. Infinity Grp. Co.,
212 F.3d 180, 197 (3d Cir. 2000). It “is appropriate where it
will assist the District Court in preventing defendants from
committing further violations[.]” TKR Cable Co. v. Cable City
Corp., 267 F.3d 196, 208 n.4 (3d Cir. 2001).
In addition to eliminating three of the four traditional
elements of the preliminary injunction standard for SEC-
initiated injunctions, see supra section II.A.1., the Second
Circuit’s approach modifies the “likelihood of success”
element when it comes to asset freezes in SEC cases. As noted
earlier, in that Circuit the SEC can “show either a likelihood of
success on the merits, or that an inference can be drawn that
the party has violated the federal securities laws.” Smith, 653
F.3d at 128 (emphasis added). That modification began with a
case called SEC v. Unifund SAL, 910 F.2d 1028 (2d Cir. 1990).
The Second Circuit reasoned there that “an ancillary remedy
may be granted, even in circumstances where the elements
required to support a traditional SEC injunction have not been
established, and such a remedy is especially warranted where
it is sought for a limited duration.” Id. at 1041 (emphasis
added) (citation omitted). The court imposed a thirty-day asset
freeze in that case because there was a “basis to infer” that there
Act, id. § 78u(d)(1). See supra note 18. Accordingly, our
holding applies to SEC-initiated injunctions under both 15
U.S.C. §§ 77t(b) and 78u(d)(1).
25
was insider trading. Id. In later cases, however, the Second
Circuit has applied that “inference” standard to asset freezes
generally, without considering the duration of the freeze. 22
Smith, 653 F.3d at 128.
We can understand why the SEC likes that approach,
but there is no statutory basis for it. 23 Nor can we see any other
reason to hold the SEC to a lower burden when it argues for an
asset freeze rather than other types of injunctive relief.
Accordingly, consistent with the principles stated in Romero-
Barcelo, courts in this Circuit should apply the traditional
“likelihood of success on the merits” standard when deciding
whether to impose an asset freeze.
22
It does not appear that any other Circuit has adopted
the Second Circuit’s modified “likelihood of success” standard
for asset freezes. See, e.g., Fife, 311 F.3d at 3, 8 (applying
likelihood-of-success standard to an SEC asset freeze); Cherif,
933 F.2d at 407-08 (same because the parties in that case
agreed that the standard was “the usual one”); SEC v. Liu, 851
F. App’x 665, 668 (9th Cir. 2021) (applying “probable success
on the merits” standard to an SEC asset freeze injunction); cf.
SEC v. Scoville, 913 F.3d 1204, 1214 (10th Cir. 2019)
(applying likelihood-of-success standard to a preliminary
injunction that included an asset freeze).
23
We requested supplemental briefing from the parties
regarding the Second Circuit’s asset freeze standard. The SEC,
rather than arguing the Second Circuit’s standard should apply
in this case, acknowledged that “this Court need apply only the
traditional likelihood of success standard[.]” (SEC Supp. Br.
at 1 (internal citations omitted).)
26
Thus, for the SEC to succeed in this case, it must show
that it is likely to succeed on the merits. In other words, “it
must demonstrate that it can win[,] … which requires a
showing significantly better than negligible but not necessarily
more likely than not” that Chappell violated insider trading
laws. Reilly v. City of Harrisburg, 858 F.3d 173, 179 (3d Cir.
2017).
B. The District Court Did Not Err in Finding
that the SEC is Likely to Succeed on the
Merits.
Insider trading occurs “when a corporate insider trades
in the securities of his corporation on the basis of material,
nonpublic information.” United States v. O’Hagan, 521 U.S.
642, 651-52 (1997). To hold someone liable for insider
trading, the SEC also “must establish the requisite scienter[.]”
Infinity Grp., 212 F.3d at 191. Scienter is a “mental state
embracing intent to deceive, manipulate, or defraud.” Matrixx
Initiatives, Inc. v. Siracusano, 563 U.S. 27, 48 (2011) (internal
quotation marks omitted).
Chappell argues that the District Court abused its
discretion by making errors of law in its materiality and
scienter analyses when it determined that the SEC was likely
to succeed on its securities violations claims against him. Our
conclusion is to the contrary.
27
1. The District Court Did Not Err in
Concluding That the FDA Feedback Was
Material. 24
Materiality is a “fact-specific inquiry” that “depends on
the significance the reasonable investor would place on the
withheld or misrepresented information.” Basic Inc. v.
Levinson, 485 U.S. 224, 240 (1988). A fact is material if there
is a “substantial likelihood that the disclosure of the omitted
fact would have been viewed by the reasonable investor as
having significantly altered the total mix of information made
available.” Id. at 231-32 (internal quotation marks omitted).
Chappell asserts that the District Court “ignored the
substantial body of law holding that preliminary FDA feedback
of the type at issue here is not material.” (Opening Br. at 4.)
The “substantial body of law” he principally relies on is In re
Sanofi Sec. Litig., 87 F. Supp. 3d 510, 516 (S.D.N.Y. 2015),
aff’d sub nom. Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016).
In In re Sanofi, a pharmaceutical company repeatedly
chose not to disclose interim FDA feedback that expressed
concerns over the single-blind design of one of the company’s
clinical trials. Id. at 519. The FDA told the company that the
trials would “not provide substantial support for a license
application,” and recommended the use of a double-blind
24
“Materiality is a mixed question of law and fact, and
the delicate assessments of the inferences a reasonable
shareholder would draw from a given set of facts are peculiarly
for the trier of fact.” Shapiro v. UJB Fin. Corp., 964 F.2d 272,
280 n.11 (3d Cir. 1992).
28
study. Id. at 519-20 (internal quotation marks omitted). The
company did not disclose that feedback; rather, it continued to
publicly state it was optimistic about obtaining FDA approval.
Id. at 519, 522. After the FDA publicly released a report that
“sharply criticized” the company’s submissions, the
company’s stock price fell, and lawsuits followed claiming that
the company failed to disclose flaws in its clinical trials. Id. at
523-24.
The district court in In re Sanofi determined that the
interim feedback criticizing the single-blind study was not
material, explaining that the materiality inquiry is of a “fact-
intensive nature” and that “context is important” when
determining whether disclosures are misleading. Id. at 528,
539, 541. The court reasoned that “much of the information
conveyed to [the company] by the FDA was publicly available
… [and that] the FDA feedback specific to the … clinical trials
was part of an ongoing conversation with the [A]gency that
defendants had no affirmative legal duty to disclose.” Id. at
539.
The court also noted that “courts have rejected claims
of material omissions where pharmaceutical companies did not
reveal procedural or methodological commentary, or other
interim status reports, received from the FDA as to drugs under
review.” Id. at 541. As the In re Sanofi court saw it, “interim
… feedback is not material because it does not express a
binding agency decision and is subject to change as the FDA
and pharmaceutical companies work together to develop viable
clinical trials and approvable licensing applications.” Id. at
542.
29
On the other hand, the opinion in In re Sanofi made clear
that, “[h]ad the FDA told the company that approval was
impossible given the single-blind methodology – essentially,
giving advance notice of [the drug]’s certain rejection – [the
company]’s failure to disclose that feedback while touting its
optimism about FDA approval would have assuredly been a
material omission.” Id. at 545 n.15.
Chappell does not dispute In re Sanofi’s principle that
FDA “feedback that is ‘tantamount to a statement that [the
drug] could not or would not obtain timely FDA approval’”
would be material. (Opening Br. at 39-40 (quoting Sanofi, 87
F. Supp. 3d at 541).) In fact, in the District Court, Chappell’s
counsel explicitly conceded that “[i]f the FDA said, ‘You are
not getting approved. We saw your data, you’re not getting
approved,’ yes, that is material.” (J.A. at 34.)
Accepting for the sake of discussion that the In re Sanofi
court was correct in its statements about interim FDA
guidance, 25 the question of materiality before us is whether,
under the facts of this case, the District Court abused its
25
We need not and do not decide that the In re Sanofi
decision was correct in this regard. It may have been, but it is
enough for today to assume it was, since Chappell loses even
under that view of materiality. Chappell argues that we have
“embraced the reasoning and result set forth in Sanofi” in two
not-precedential opinions (Opening Br. at 38.) We question
that assertion but, in any event, “[w]e do not accept [our NPOs]
as binding precedent because, unlike precedential opinions,
they do not circulate to the entire court before they are filed.”
Jamison v. Klem, 544 F.3d 266, 278 n.11 (3d Cir. 2008).
30
discretion in resting an injunction on the finding that the SEC
will likely be able to show that a reasonable investor would
have viewed the interim FDA feedback more like an “advance
notice of [Lenz’s] certain rejection[,]” Sanofi, 87 F. Supp. 3d
at 545 n.15, than as a “part of an ongoing conversation[,]” id.
at 539.
a) Under the facts of this case, the
FDA feedback was akin to a
rejection.
In addition to arguing that the FDA’s feedback “was
precisely the sort of preliminary or interim feedback that courts
routinely have deemed immaterial for securities law purposes,”
Chappell says that the FDA’s comments actually showed there
was still hope for EUA approval. (Opening Br. at 1.)
Even if we accept that the FDA’s feedback included
some positive comments about Lenz, Chappell’s arguments
falter in light of the FDA’s repeated warnings to Humanigen
that its only hope for the drug to receive EUA approval was to
conduct a second clinical trial. As described by the District
Court, here are the facts again, and they show that the District
Court’s materiality analysis is not clearly erroneous:
• Before the April 2021 pre-EUA meeting, the FDA sent
written comments to Humanigen stating it had
“significant concerns that negatively impact the ability
to rely on this single trial to support the potential benefit
of [Lenz]” and further stating it recommended
Humanigen “conduct an additional trial(s)[.]” (J.A. at
767-68.)
31
• At the pre-EUA meeting, the FDA asked Humanigen if
it was going to conduct another clinical trial.
Humanigen responded that it had an ongoing “ACTIV-
5” trial with the NIH that included a “[L]enz[] arm but
had no current plans for further clinical trials.” (J.A. at
344.) The FDA replied that the NIH ACTIV-5 trial was
“likely not sufficient to serve as a confirmatory trial[,]”
and it “strongly recommended that [Humanigen]
conduct an additional confirmatory study[,] and
discouraged submission of an EUA at [that] time.”
(J.A. at 344.)
• On May 4, 2021, Humanigen notified the FDA that it
was “planning to submit an EUA Request within
approximately a month” with “additional analyses” and
“a more complete data package[.]” (J.A. at 368.) The
FDA emailed Humanigen a post-meeting comment to,
in part “reiterate [its] concerns … that … [Lenz] is
unlikely sufficient to satisfy the criteria for issuance of
an EUA.” (J.A. at 344.) “In lieu of an EUA request,
[the FDA] strongly recommend[ed] that [Humanigen]
submit a meeting request to further discuss [its]
continued development program, which includes details
regarding additional confirmatory clinical trial(s)[.]”
(J.A. at 344.)
These several communications from the FDA were
clear – Humanigen was not going to receive Emergency Use
Authorization for Lenz without conducting a second clinical
trial. And Humanigen’s own CFO and securities compliance
officer declared that the FDA feedback should be disclosed to
32
the market. 26 Yet, Humanigen submitted the EUA request
without disclosing the obviously foreboding feedback to the
public and without conducting – and without approved plans
to conduct – any further clinical trials, thus practically
guaranteeing a rejection.
The District Court, in response to Chappell’s contention
that the FDA feedback was not material because it was not a
final determination, explained how Humanigen’s decision to
submit the EUA request without completing a second clinical
trial made it a foregone conclusion that Lenz would not receive
Agency approval:
[The FDA] told you [that] you’re going to have
to do a number of things to have a real chance of
getting this passed[.] [Y]ou don’t do those
things, you submit the EUA anyway, it’s [a]
foregone conclusion [that] you’re going to get
rejected in light of what they told you in April
when you haven’t addressed their concerns.
(J.A. at 34.) That is not a clearly erroneous assessment; it is
clearly correct. Because Humanigen submitted the EUA
request for Lenz without conducting a second clinical trial as
instructed by the FDA, the District Court rightly concluded that
the SEC has a high likelihood of showing that the Agency’s
26
As previously noted, see supra section I.A.5., the
Humanigen board ultimately decided not to disclose the
feedback to the public because, in its view, the clinical trial
data was incomplete.
33
feedback was so akin to an outright denial of an Emergency
Use Authorization as to be material information for investors. 27
b) There was no second clinical
study.
Despite the factual record, Chappell asserts that there
was a second clinical study performed – the NIH ACTIV-5
study. He contends that “Humanigen promptly addressed the
FDA’s preliminary concerns by submitting additional evidence
and conducting a second study, and continued its efforts to
obtain an EUA.” 28 (Opening Br. at 1.)
That is not how we read the record. The NIH ACTIV-
5 study was not a new confirmatory study; it was an expansion
of a study that was already ongoing, and one that the FDA had
already said would not qualify as a confirmatory study.
Nothing in the record, other than Chappell’s unsupported
27
Chappell also asserts that the FDA denied
Humanigen’s EUA application because Humanigen used a
particular regression model the FDA found wanting, not
because it failed to complete a second study. The record belies
that argument. The overall reason for the denial was stated
clearly in the denial letter: “[B]ased on the totality of scientific
evidence available, … we are unable to reasonably conclude
that [Lenz] may be effective for the treatment of COVID-19 as
proposed.” (J.A. at 622.)
28
In his Reply Brief, Chappell doubles down on his
assertion that it conducted a second study, even including a
header that says, “Humanigen Did Exactly What the FDA
Asked[.]” (Reply Br. at 6.)
34
assertions, suggests that the FDA would have, at some point,
approved that expansion as constituting a second clinical study.
Indeed, after Humanigen notified the FDA of the expanded
NIH ACTIV-5 study, the FDA still strongly encouraged
Humanigen to refrain from submitting its EUA request and to
discuss the expansion with the Agency. Further, even if the
study could have played the confirmatory role the FDA was
demanding, it was not complete by the time Humanigen
applied for EUA approval. 29
c) The District Court did not
improperly rely on the SEC’s
argument that disclosure fraud
cases are inapplicable in the
insider trading context.
Next, Chappell alleges that the District Court
committed legal error because it mistakenly relied “on the
SEC’s argument that disclosure fraud cases are inapplicable in
the insider trading context – an argument that the SEC since
29
Chappell retorts that “[i]t is immaterial that the
specifics of ACTIV-5’s expansion were not finalized when the
EUA application was submitted because they were finalized
and announced well before the FDA rendered decision on the
EUA[.]” (Reply Br. at 7 n.4 (citation omitted).) But he points
to nothing in the record that shows that the NIH ACTIV-5
study was ever finalized nor that the FDA would have found
that the study was sufficient to serve as a confirmatory study.
35
has abandoned.” 30 (Opening Br. at 4.) Chappell’s “point is
simply that the materiality standard is the same in both
contexts, so cases in the disclosure context are instructive.”
(Reply Br. at 13.)
At the District Court hearing, the SEC alleged that
Chappell was “trying to conflate the disclosure laws with the
insider trading laws.” (J.A. at 21.) It explained that “[n]ot
every piece of material information triggers the disclosure
laws” (J.A. at 21), and the District Court agreed. When
Chappell brought up In re Sanofi, the Court responded:
I’m not talking about Sanofi. I’m talking about
what your client knew when he traded on that
stock. … This is not a disclosure obligation for
Humanigen. … I’m not saying your client had to
disclose it. What I’m saying is your client
couldn’t trade on it without disclosing it.
(J.A. at 77.)
Chappell asserts that the Court’s response shows that it
misunderstood that the materiality standard is the same in both
contexts. 31 A fairer reading of the hearing transcript shows that
30
On appeal, the SEC does not argue that materiality
differs depending on whether the case involves disclosure
fraud or insider trading.
31
The Supreme Court has indicated that the materiality
standard is the same in both the insider trading and disclosure
contexts: “We find no authority in the statute, the legislative
history, or our previous decisions for varying the standard of
36
the District Court did not improperly apply the law to find that
the FDA feedback was material. Rather, the Court correctly
undertook a context-based approach to determine whether the
FDA feedback was material:
Critically we look at Humanigen because we
have to determine materiality based on the facts
and circumstances. … [Lenz] was the only
potential viable product [of the Company’s] at
the time. It’s also unrefuted that besides that
product Humanigen had no product sales, had
suffered significant net losses, and had negative
operating cash flows. That’s important from a
materiality standpoint, because at this point all
the eggs are in the basket of Lenz as far as
Humanigen is concerned, and they’re going to
sink or swim with this one particular antibody.
Whether they sink or swim at this point is going
to be whether or not they get the EUA from the
FDA.
(J.A. at 64-65.) Thus, the District Court did what Supreme
Court precedent instructs, “assessing [] materiality … [as] a
fact-specific inquiry that requires consideration of the source,
materiality depending on who brings the action or whether
insiders are alleged to have profited.” Basic Inc. v. Levinson,
485 U.S. 224, 240 n.18 (1988) (citing Pavlidis v. New England
Patriots Football Club, Inc., 737 F.2d 1227, 1231 (1st Cir.
1984) (“A fact does not become more material to the
shareholder’s decision because it is withheld by an insider, or
because the insider might profit by withholding it.”)).
37
content, and context[.]” Siracusano, 563 U.S. at 43 (internal
quotation marks and citation omitted). And the District Court,
in effect, acknowledged the reasoning of In re Sanofi, but
found that the case was distinguishable:
I understand if you’re negotiating with a
regulatory agency and they say, “At this stage
it’s insufficient, but if you do A, B, and C, there
may be an opportunity.” … But here the FDA
said, “This is what we’re going to need,” and
your clients didn’t do it.
(J.A. at 34.) We see no error in that analysis.
As a final argument regarding materiality, Chappell
asserts that “the sparse reasoning described by the District
Court was insufficient to justify its finding regarding
materiality[.]” (Opening Br. at 43.) He is wrong. Several
times throughout the hearing, the Court signaled that the FDA
feedback, taken in toto, was material because it was very much
like a final Agency order. Moreover, the Court recapped its
materiality finding at the end of the hearing:
So was it material? Yes. In light of the size of
Humanigen, its losses, its business not doing
very well and then only having one viable
product, yes. This was a bet-the-company
product.
…
And of course you look at the decline in the stock
price by approximately 50 percent on higher
volume sales once it was determined on
September 9th of 2021 publicly that the EUA
38
was not going to be approved. I don’t think
materiality is a close call in this case.
(J.A. at 80-81.)
The District Court summed it up succinctly – “the
bottom line is this: The FDA in so many words said [that
y]ou’re not going to get [the EUA] unless you do another
confirmatory trial.” (J.A. at 75.) Considering that Humanigen
never undertook nor planned to undertake a second study, the
District Court did not err in concluding that the SEC met its
burden to show there is a likelihood of success in proving that
the FDA feedback was material.
2. The District Court Did Not Err in
Concluding that the SEC Will Likely Be
Able to Show That Chappell Acted with
Scienter.
As stated previously, scienter is a “mental state
embracing intent to deceive, manipulate, or defraud.”
Siracusano, 563 U.S. at 48 (internal quotation marks omitted).
It can be demonstrated by circumstantial evidence. McLean v.
Alexander, 599 F.2d 1190, 1198 (3d Cir. 1979)
(“Circumstantial evidence may often be the principal, if not the
only, means of proving bad faith.”). Specifically, “[i]nsider
trading in suspicious amounts or at suspicious times is
probative of bad faith and scienter.” In re Apple Computer Sec.
Litig., 886 F.2d 1109, 1117 (9th Cir. 1989).
Chappell says the District Court “disregarded the
compelling evidence that [he] acted in good faith,”
“improperly failed to hold the SEC to its burden of showing
39
likelihood of success as to scienter[,] and, further, shifted the
burden to [him] to adduce additional and superfluous evidence
when there was patently no requirement to do so in this
posture.” (Opening Br. at 4.) None of his arguments succeed.
a) The District Court did not
disregard Chappell’s evidence.
Chappell asserts that the District Court did not seriously
address the evidence of good faith in his trading activity. 32 He
alleges that he “had for months been planning to sell a minority
of his … Humanigen stock – since well before receiving the
FDA feedback – for reasons entirely unrelated to the FDA’s
feedback.” (Opening Br. at 2.) He contends that his “decision
to sell … his Humanigen stock was driven by: (1) a desire to
realize some paper gains in the stock of a company in which
the Black Horse [Funds] had invested significant capital, and
32
Chappell asserts the seven following facts in an
attempt to show that he acted in good faith when executing the
trades: (1) Humanigen’s board, securities compliance officer,
and outside securities counsel were briefed in detail about the
FDA’s feedback; (2) Humanigen’s board decided not to make
an immediate disclosure about the feedback; (3) Humanigen
made disclosures about the FDA feedback on its Form 10-Q;
(4) the securities compliance officer opened the trading
window for insiders after the disclosures; (5) Chappell sought
and obtained all relevant approvals to trade Humanigen shares;
(6) Chappell had sought to reduce his exposure to Humanigen
through a no-cost collar; and (7) when that proved unworkable,
he again obtained approval for the subsequent trading plan
through which he sold his stock.
40
(2) well known uncertainty as to whether the rollout of
vaccines would shrink the market for COVID-19
treatments[.]” 33 (Opening Br. at 26.)
But he provides no good answer for the damning
evidence of a sudden shift in pricing and volume between his
March and June trading plans, a change that came after the
FDA provided its feedback on Lenz’s clinical trial. As the
District Court explained, those alterations in his trading plans
are evidence of scienter:
It just doesn’t make sense. He’s not a hedge fund
manager, he’s never hedged in this stock before.
Now all of a sudden when he thinks his ship is
about to come in, when they’re about to get the
brass ring, they’re going to get EUA approval for
this drug that they now think they can use for the
antibody they can now use for COVID-19 side
effects[,] … that now, once you’ve held onto it
for this long, five years, now you’re going to say,
“I’m going to get rid of it at 25 percent at a lower
price than I was willing to sell a month before I
met with the FDA?” It’s suspicious and it goes
to scienter. 34
33
In addition, Chappell alleges that the proceeds from
his first sale were to “provide the amount of capital [he] needed
to meet an upcoming mortgage payment.” (Opening Br. at 19.)
34
The District Court stated further:
It doesn’t make any sense. If he’s bullish on the
stock in early 2021 and he’s willing to do it at
41
(J.A. at 63-64.)
Chappell attempts to counter the District Court’s
finding by pointing to facts that, in his view, show that the
timing and parameters of the changes between the March and
June trading plans do not reflect scienter. First, he says that,
prior to the FDA feedback, Chappell “communicated with
multiple brokers about his plans to sell a significant portion of
the [his] Humanigen holdings” (Reply Br. at 24) and that he
told one broker that there was “a lot more to come” after the
attempted 9% selloff via the March trading plan (J.A. at 759).
While that evidence lends support to Chappell’s argument that
he wanted to sell more shares, it does not explain why,
especially if he believed that Lenz was about to get EUA
approval, he decided to sell shares at a discount after the FDA
feedback, when he was previously willing to sell them only at
a premium.
[$]25 [a share], why isn’t he still bullish on it and
going to wait out his investors, whatever their
size may be, because now his ship has come in?
It doesn’t make any sense he’s going to start
unloading a massive amount of stock when he
thinks he’s going to get FDA approval.
…
He wasn’t hedging at all. He didn’t start hedging
until five years in. I could understand if he was
running this as a hedge, but he holds it for four
and a half, five years and now he’s going to
worry about a hedge when he thinks he’s about
to get the biggest success of his career?
(J.A. at 38-40.)
42
Second, Chappell contends that it is false to say that he
initiated communications with a broker less than two hours
after Humanigen received the FDA’s negative post-meeting
feedback, because he emailed his broker about setting up a new
trading plan before he was personally in receipt of the FDA
post-meeting comment. What he fails to mention, but what the
SEC points out, is that “[s]tarting twenty-eight minutes after
Humanigen received [the] FDA’s May 13, 2021, post-meeting
comment strongly discouraging the company from submitting
an EUA application for [Lenz], [which was sent to
Humanigen’s CEO,] Chappell spoke on the phone with [the]
CEO several times.” (Answering Br. at 15.) Thus, it can
reasonably be inferred that Chappell was informed of the post-
meeting comment’s contents prior to contacting his broker,
even if he did not personally receive a copy of the FDA’s
comment until later.
Third, Chappell argues that “the high limit price in the
March Plan[] simply reflects that [he] had to set up the plan[]
before announcement of the phase 3 data and had to guess
weeks in advance how much the stock price might appreciate
after the data was unblinded.” (Reply Br. at 25.) Even if that
were true, though, it does not explain, as the District Court
noted, why Chappell was not “bullish” in June after the FDA
feedback, if he indeed was not treating that feedback as
seriously detrimental. (J.A. at 38.)
Fourth, Chappell says that the no-cost collar
arrangement he attempted in June, see supra note 9, supports
his argument that he believed, at that time, that the stock was
going to appreciate. Not so. While such a transaction would
have allowed Chappell to capture some (but not necessarily all)
43
of the potential upside gains if the stock appreciated in value,
a no-cost collar would have also allowed him to minimize his
losses if the stock price decreased considerably, by locking in
sales at a price above the fallen market price. Chappell in fact
admits that one of the reasons he tried to execute a no-cost
collar arrangement was to “reduc[e] downside exposure” while
avoiding “a negative signal to the market” that an outright sale
would potentially send. (J.A. at 682.) So, the no-cost collar
argument is no proof against a finding of scienter.
b) The District Court did not shift the
burden to Chappell.
Chappell further argues that the District Court shifted
the burden of proof from the SEC to him. For example, he
points to the District Court’s questions at the hearing asking
him why he had not submitted affidavits from the Humanigen
insiders who approved the sales. He also complains about the
Court asking him for evidence that the stock’s trading volume
would have allowed him to sell more than 25% of his stock.
We are persuaded, however, by the SEC’s assertion that the
District Court was not burden-shifting but rather was
“appropriately scrutiniz[ing] the credibility of Chappell’s
claim of good faith by asking for corroborating
documentation[.]” (Answering Br. at 53.) The Court was
unpersuaded by Chappell’s “cherry-picked” declaration and
exhibits and wanted further support for his bald assertions.
(Answering Br. at 53.)
Lastly, Chappell contends that the reasoning offered by
the District Court was insufficient to sustain a finding of
scienter. But the Court explained in detail why it found that
Chappell had the necessary mindset:
44
And as to the requisite scienter, … you get that
type of letter from the FDA which in so many
words says, “We strongly recommend you do a
confirmatory trial and talk before you submit
your EUA[,]” and you submit the EUA anyway,
[which] you had … at best … a negligible chance
of getting through and most likely [a] zero
percent chance of getting through.
Then we have the fact that Mr. Chappell sold a
lot more than 9 percent, inconsistent … with his
prior lack of trading[.] … [He] went from 9
percent to 25 percent and also at a much lower
price. The FDA has sufficiently shown through
circumstantial evidence that Mr. Chappell had
the requisite scienter when he made these trades.
(J.A. at 81-82.) We discern no error in the District Court’s
conclusion that the SEC has met its burden to show a likelihood
of success in demonstrating that Chappell acted with scienter
in his trading activities.
C. The Other Factors of the Preliminary
Injunction Standard Support a Preliminary
Injunction.
The District Court did not analyze the irreparable-harm,
balance-of-the-equities, or public-interest prongs of the
preliminary injunction test at the hearing it held. But “[w]e
may affirm the district court’s grant of a preliminary injunction
and asset freeze on any grounds supported by the record.” Fife,
45
311 F.3d at 8. Here, Chappell is eager for an answer as to
whether the injunction is valid, 35 and we will oblige.
As for the irreparable-harm requirement, the District
Court, in its order granting the TRO (which was incorporated
into the preliminary injunction), found that there would be
irreparable harm without an injunction because “[t]here [was]
good cause to believe that, unless funds and assets are frozen
… [Chappell] will dissipate, conceal, or transfer from the
jurisdiction of this Court assets that could be subject to an order
directing disgorgement or the payment of civil money penalties
in this action.” (J.A. at 2.) Chappell never contested that
finding, so any argument that it was incorrect is forfeited. Cf.
Vickers v. Superintendent Graterford SCI, 858 F.3d 841, 852
n.11 (3d Cir. 2017) (explaining that, generally, “an issue not
raised in an appellant’s opening brief is [forfeited]”).
35
After oral argument, the SEC amended its complaint,
which Chappell says further delays the District Court’s
resolution of the case. He subsequently filed a letter
complaining that the length of time to trial is an additional
hardship warranting a lift of the asset freeze. While the
duration of a preliminary injunction is a factor we consider
when reviewing an injunction’s appropriateness, we do not
believe the trial schedule to be so far into the future as to be
unduly onerous. The SEC has set forth serious allegations that
Chappell violated securities laws, and there is a significant risk
of capital flight were we to vacate the asset freeze. But we take
his implicit point that the validity of the injunction needs to be
addressed, and we do so now.
46
Even if he had challenged the irreparable-harm finding,
the challenge would surely have failed. Chappell’s apparent
(on this record) willingness to trade on inside information to
avoid losses makes us wary that he would also, but for the
preliminary injunction, seek to conceal assets to avoid a
potential future order directing him to disgorge an amount
equal to the losses he avoided. Moreover, he lives in a foreign
country, which creates a risk that he will be able to place assets
out of the reach of United States’ authorities. And, as the
District Court observed, Chappell spends lavishly, so assets
needed for disgorgement may well also be dissipated without
an asset freeze. Thus, the irreparable harm requirement is
satisfied.
The third preliminary injunction factor requires us to
“balance the parties’ relative harms; that is, the potential injury
to the plaintiffs without this injunction versus the potential
injury to the defendant with it in place.” Issa v. Sch. Dist. of
Lancaster, 847 F.3d 121, 143 (3d Cir. 2017). At this stage, a
court should also consider “the possibility of harm to other
interested persons from the grant or denial of the injunction.”
Reilly, 858 F.3d at 176. Chappell avoided approximately $38
million in losses, so there is a substantial potential injury to
Humanigen shareholders if Chappell is able to successfully
move assets out of the reach of future judgment creditors,
especially if the SEC prevails in obtaining disgorgement. On
the other side of the scale, if the preliminary injunction is
maintained, Chappell’s assets are mostly frozen, but he still
maintains his Humanigen salary (or an equivalent amount) of
$5,637.50 every two weeks, and he has received other relief
47
from the freeze. 36 While he may have to live more frugally
than he has been accustomed to, he certainly will not be living
like a pauper. Furthermore, the Court appointed a receiver to
manage Chappell’s assets during the pendency of this case.
For those reasons, the equities significantly favor upholding
the injunction.
The fourth factor requires us to determine whether the
injunction is in the public interest. “As a practical matter, if a
plaintiff demonstrates both likelihood of success on the merits
and irreparable injury, it almost always will be the case that the
public interest will favor the plaintiff.” Am. Tel. & Tel. Co. v.
Winback & Conserve Program, Inc., 42 F.3d 1421, 1427 n.8
(3d Cir. 1994). Here, affirming the injunction is clearly in the
public interest. Corporate insiders have a duty to the investing
public to disclose material information before trading on that
information themselves. United States v. O'Hagan, 521 U.S.
642, 652 (1997) (explaining that “a relationship of trust and
confidence exists between the shareholders of a corporation”
and corporate insiders, which “gives rise to a duty to disclose
or to abstain from trading because of the necessity of
preventing a corporate insider from taking unfair advantage of
uninformed stockholders” (internal quotation marks and
citation omitted) (cleaned up)). Facilitating the proper
enforcement of that duty is all to the good.
36
Pursuant to a joint stipulation by the parties, the
District Court released from the asset freeze, among other
things, up to $300,000 for Chappell’s legal fees, approximately
$162,000 per academic year for his children’s educational
expenses, and $50,000 for his wife.
48
Accordingly, the preliminary injunction factors weigh
in favor of the relief granted by the District Court.
III. CONCLUSION
For the forgoing reasons, we will affirm the District
Court’s order granting the preliminary injunction.
49