Draft:SEC vs. Lemelson

SEC v. Lemelson, et al.. (2021, docket No 1:18-cv-11926), is a landmark civil case brought by the U.S Securities and Exchange Commission (SEC) in U.S. District Court for the District ofMassachusetts, in which the SEC charged Greek Orthodox Priest, social commentator and hedge Fund manager Emmanuel Lemelson with an alleged "scheme to defraud investors," related to a short sale involving Ligand Pharmaceuticals. Media reports implicated former Congressmen Duncan Hunter and former high ranking SEC official Brad Bondi in the prosecution.

The SEC argued that the campaign took the form of over a dozen misstatements and omissions, and charged Lemelson with intentional fraud as well as violations of the Investment Advisors Act. The SEC sought, in addition to other penalties, a permanent injunction.

On November 5, 2021, a federal jury rejected the allegations of fraud in a mixed verdict.

Background

In June 2014, Lemelson, while making a $4.6 million short bet against Ligand Pharmaceuticals., published 56 pages of reports that criticized the company as a fraud and alleged the company was insolvent. The commentary caused a $500 million drop in the company's market capitalization and a profit of $1.4 million to Lemelson's investors. Ligand executives, former high ranking-SEC lawyer Brad Bondi and congressmen Duncan Hunter subsequently spent years lobbying the U.S. Securities and Exchange Commission to charge Lemelson. According to company emails and trial testimony, Ligand CEO John Higgins wanted Lemelson "silenced for good."

Allegations of Securities Fraud

In September 2018, the SEC sued Lemelson and his firm Lemelson Capital Management (LCM) for an alleged "manipulative scheme" to defraud investors. The SEC argued that the campaign took the form of over a dozen misstatements and omissions, and charged Lemelson with intentional fraud as well as violations of the Investment Advisors Act. The SEC sought, in addition to a suite of penalties, a permanent injunction preventing the Lemelson "from violating Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5] and Section 206(4) of the Advisers Act [15 U.S.C. § 80b-6(4)] and Rule 206(4)-8 thereunder [17 C.F.R. § 275.206(4)-8]."

Trial and Aftermath

After Lemelson turned down several agency settlement offers the case went to trial in late October 2021. Lemelson calling the action "a gross abuse of prosecutorial discretion."

During the trial, Ligand CEO John Higgins stated that Lemelson's claims regarding the company's insolvency were "absurdly false" and put the company in a "crisis." Higgins described the effect as "relentless" and stated "almost every meeting was consumed by the Lemelson reports." Higgins was later questioned why he repeatedly went to taxpayer-funded regulators, even after the SEC told the company "there was no case to be had." Attorney's for Lemelson asked, "Instead of responding publicly, yourself, to all of these allegations, you continued paying lawyers to lean on the SEC, right?"

"Lemelson described the company as a "fraud that needed to be exposed," stating, "The company was a financial conduit to move capital from common shareholders to executives." Lemelson later testified "they were exploiting loopholes - accounting loopholes and regulatory loopholes - but they weren't creating any real or enduring value for shareholders."

The SEC described Lemelson as a "savvy investor" who targeted Ligand to boost the value of his firm's $4.6 million short position in the company by telling Ligand investors to "run, Bambi, run." In closing arguments, the SEC argued Lemelson set out to "rock the stock," crashing its value.

Defense attorney's also argued the government's case was built on Ligand's campaign to silence Lemelson's criticism of the company. "There may be a scheme here, but the only one who engaged in a scheme is Ligand, not Father Lemelson," attorney, Douglas Brooks told the jury. He said the company convinced the SEC to open a case against Lemelson only after a second visit to the agency in Washington D.C. and a letter from then congressman Duncan Hunter urging action.

On November 5, 2021, following the seven-day trial, a federal jury rejected the Commissions allegations, in a mixed verdict, which cleared Lemelson of the commentary on Ligand in his reports and the allegations of fraud, but did find Lemelson liable for misstatements including about a different, non-public company, Viking Therapeutics which Lemelson did not trade in. The verdict represented liability on just one part of one count and found Lemelson's firm (LCM) liable for none.

In December 2021, the SEC asked the court for $2.3 million in penalties, disgorgement and interest as well as a lifetime injunction that would form the basis to bar Lemelson from the securities industry. At the end of March 2022, U.S. District Judge Patti B. Saris, referring to Lemelson as "pugilistic" fined him $160,000, but limited the SEC's request for injunctive relief to five years.

Lemelson petitioned the Supreme Court of the United States for review of the remaining adverse part of the verdict. The petition hinged on a constitutional freedom of expression question: can the SEC "punish commentary about publicly traded corporations that contains a few purported misstatements or omissions when a jury has cleared the accused of all fraud and deception charges?" The writ of certiorari was declined in December 2023.

In January 2024, Lemelson, as the "prevailing party," filed a motion with the court to recover more than $1.7 million in legal fees and costs from the SEC.

Media Coverage

During pretrial proceedings, the SEC and Ligand accused Lemelson of trying to "poison the well" with selective leaks of confidential documents to a Barrons reporter. Lemelson, who admitted to sharing documents, was held in contempt of court and sanctioned for the incident. Lemelson shorted Ligand stock again during this time, however was not required to hand over the profits from the trade as part of the sanctions, but was barred from taking any further position in Ligand's stock.

Following the trial, media outlets noted the SEC falsely claimed it had prevailed on the allegation that Lemelson ran a "manipulative short scheme."

Lemelson, addressing federal judge Patti Saris, who was weighing his penalty in a post-trail hearing, stated; "Literally everyone involved in this case is a criminal on the other side. Time will reveal truth and justice in this case. I'll never regret the things I did." Media reported that Lemelson stood by his statements about the companies, saying, "I always spoke the truth," and predicted Ligand would ultimately "Collapse under the weight of their own fraud" regardless of what happens to him. Lemelson's address ranked as the "Spiciest courtroom quote heard in Massachusetts in 2022".

According to Sarah Heaton Concannon, writing for Reuters, “Not only was the jury unconvinced by the SEC's showing with regard to misstatements, the jury outright rejected the SEC's fraudulent scheme charge; the jury also found the SEC failed to prove a negligent, reckless, or intentional violation of the Investment Advisors Act by either Lemelson or LCM.” Concannon, continued: “The Commission brought the widest array of potential claims against Lemelson and his company, and his decision to fight the charges paid off. Most importantly, he turned a lifelong injunction into a term of years. He also succeeded in protecting his advisory business and the fund it managed from any liability whatsoever."

Chris Villani writing for Law360 characterized the outcome as Lemelson "largely beat" the SEC.