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Securities and Exchange Commission v. Yang

United States District Court, N.D. Illinois, Eastern Division

February 24, 2014



MATTHEW F. KENNELLY, District Judge.

Between March 14 and 15, 2012, 50, 000 shares of Zhongpin, Inc. and more than 1, 900 call option contracts of Zhongpin stock were purchased in the Yang/Fan Sogotrade account. (Trial Tr. Jan. 8, 2014, pp. 285, 290-91, 311.) At trial, defendant Siming Yang took the stand and disclaimed knowledge of, or responsibility for, such trading. ( Id. at 872-79.) He testified that the account, and the funds in it that were used to purchase Zhongpin securities, belonged not to him but to his co-defendant, Caiyin Fan. ( Id. at 872-79) The jury didn't buy it, as evidenced by their verdict finding Yang liable for two types of securities fraud: (1) front running and (2) making material misrepresentations in disclosures to the SEC. In connection with the latter fraud count, the jury also found Yang liable for violating the disclosure requirements of Section 13(d) and Rule 13d-1 of the Securities Exchange Act of 1934 ("Exchange Act").

After Yang traded for his personal account, he then caused his hedge fund, Prestige Trade Investments Limited ("Prestige") to buy millions of shares of Zhongpin stock. (Trial Tr. Jan. 6, 2014 at pp. 306-07.) As SEC accountant John Kustusch testified at trial, Prestige's trades represented 40.7% of the total market trading volume in Zhongpin stock from March 15 through March 23, 2012. ( Id. ) Predictably, Prestige's ravenous appetite for Zhongpin stock had an unmistakable impact on the price. Over the course of 7 trading days - between March 15, when Prestige began its buying spree, until March 23, after it had finished buying 3 million shares of Zhongpin stock - the stock price spiked 15.5%. (Ex. 1, Kustusch Declaration ¶ 6.) Critically for present purposes, this run-up in the price of Zhongpin stock - the focus of the disgorgement analysis discussed below - all preceded the March 27 announcement of the proposed buyout by Zhongpin's CEO. (Trial Tr. Jan. 6, 2014 at pp. 301-07.) And because Yang bought for himself before he bought for Prestige, he was the real beneficiary of that pre-announcement spike - to the tune of about $150, 000. ( See Ex. 1, Kustusch Declaration ¶ 10.)

Prestige's ownership interest in Zhongpin stock soon exceeded 5%, which triggered a disclosure obligation under Section 13(d) and Rule 13d-1 of the Securities Exchange Act of 1934 ("Exchange Act"). In Prestige's resulting Schedule 13D filings with the SEC, Yang - while acknowledging his status as a reporting person - nonetheless failed to disclose his front-running in Zhongpin securities. ( See Pl.'s Trial Exhibit 103, Schedule 13D Item 5(c).) Instead, he lied, misrepresenting that he had not bought or sold Zhongpin stock during the previous 60 days. ( Id. ) The jury found that he made that misrepresentation either knowingly or recklessly.

Based upon both the jury's finding that Yang committed securities fraud and the supporting evidence established at trial, in this motion the SEC seeks: (a) a permanent injunction enjoining Yang from continued violations of those securities laws for which the jury found him liable (Section I below); (b) disgorgement of $151, 432 (Section II); (c) prejudgment interest of $8, 911.59 (Section II); and (d) civil monetary penalties of $750, 000 (Section III).


Given the jury's verdict finding that Yang violated the antifraud provisions of the Exchange Act and the Investment Advisers Act of 1940 ("Advisers Act") - as well as the reporting requirements of Exchange Act Section 13(d) - an order permanently enjoining him from violating such laws is appropriate once the SEC demonstrates a "a reasonable likelihood of future violations." SEC v. Michel, 521 F.Supp.2d 795, 830 (N.D. Ill. 2007) (quoting SEC v. Holschuh, 694 F.2d 130, 144 (7th Cir. 1982)); 15 U.S.C. §78u(d)(1); 15 U.S.C. §80b-9(d).[1]

By committing securities fraud and violating Section 13(d) and Rule 13d-1 of the Exchange Act, Yang "caused injury to other market participants who sold stock without knowledge of [his] holdings." SEC v. First City Financial Corp, Ltd., 890 F.2d 1215, 1230 (D.C. Cir. 1989). In this regard, "Section 13(d) is not a mere technical' reporting provision; it is, rather, the pivot' of a regulatory scheme that may represent the only way that corporations, their shareholders and others can adequately evaluate... the possible effects of a change in substantial shareholdings." SEC v. Drexel Burnham Lambert Inc., 837 F.Supp. 587, 607 (S.D.N.Y. 1993) (quoting First City, 890 F.2d at 1230 (D.C. Cir. 1989)). Section 13(d) is thus "a crucial requirement in the congressional scheme, and a violator... improperly benefits by purchasing stocks at an artificially low price because of a breach of the duty Congress imposed to disclose his investment position." First City, 890 F.2d at 1230. That a securities professional intentionally lied to the SEC in his public disclosures cuts to the core of the regulatory scheme embodied in the federal securities laws.

The jury also found Yang liable for front-running, which in turn required a finding that he "knowingly purchased stock or options of Zhongpin for his personal account before purchasing Zhongpin stock for Prestige and that Mr. Yang did so to obtain a personal financial benefit without disclosing to Prestige the purchases and the conflict of interest created by the purchases." (Jury Instructions, ECF No. 243, pp. 11-12.)

Beyond the severity of these violations is the manner in which Yang engaged in such fraud. In furtherance of his misdeeds he engaged in rampant deception, lying to Sogotrade and Interactive Brokers to open the accounts that he used to trade; lying to Baron Capital, his employer, to hide his trading activity; and lying to the SEC (and the investing public by extension) in the two false Schedule 13Ds he caused to be filed. In the Schedule 13D filings Yang not only failed to disclose his personal Zhongpin trades; he affirmatively represented that he did not hold any other Zhongpin securities. ( See Pl.'s Trial Exhibit 103, Schedule 13D Item 5(c).) Moreover, the jury found that Yang either knew or at the very least was reckless in not knowing of the false information in the public filings. (Jury Instructions, ECF No. 243, pp. 13-14.)

It is precisely "this type of intentional, knowing conduct, as opposed to more minor, technical violations, for which injunctions are reserved." SEC v. Ginsburg, 362 F.3d 1292, 1305 (11th Cir. 2004); see also SEC v. Payne, No. 00-CV-1265, 2011 WL 693630, at *3 (S.D. Ind. Feb. 18, 2011) ("Although no single factor is determinative the degree of scienter bears heavily on the decision to issue an injunction.") (internal quotation marks omitted)

As a 37 year-old securities professional with an indisputable passion for investing, Yang will have ample future opportunities to break the securities laws. SEC v. Olins, 762 F.Supp.2d 1193, 1196 (N.D. Cal. 2011) (the defendant "had an extensive history of securities trading" and was "in a position whereby he will be faced with decisions implicating the securities laws."); SEC v. Savino, No 01-CV-2438, 2006 WL 375074, at *17 (S.D.N.Y. 2006) ("Due to [the defendant's] current occupation as a licensed securities professional... [he]is in a position to engage in further fraudulent conduct.")

Yang's failure to recognize - let alone appreciate the gravity of - his misdeeds bespeaks his likelihood of future violations. Rather than owning-up to his securities laws violations, Yang has instead steadfastly denied any wrongdoing. (Trial Tr. Jan. 8, 2014, p. 872-79; Trial Tr. Jan. 9, 2014, pp. 902-04.) An unfortunate corollary to such continued denials is his concomitant inability to meaningfully or sincerely assure this Court that he won't engage in such misconduct going forward. As the Seventh Circuit has recognized, "the criminal who in the teeth of the evidence insists that he is innocent... demonstrates by his obduracy the likelihood that he will repeat his crime." See SEC v. Lipson, 278 F.3d 656, 664 (7th Cir. 2002). See also SEC v. Abernathy, 1:11-cv-00580, 2012 WL 7679270, at *5 (W.D. Mich. Nov. 30, 2012) ("Defendants have never acknowledged the wrongful nature of their conduct, nor have they provided any assurances against future violations. The absence of such acknowledgments and assurances weighs in favor of a permanent injunction.").

Last-but by no means least-was Yang's lack of candor at trial. He testified under oath that he did not purchase Zhongpin securities in the Yang/Fan Sogotrade account. (Trial Tr. Jan. 8, 2014, pp. 877-78.) But, as the jury determined, the evidence established otherwise. Detective Balzanto established that the trading in that account occurred in all the places Yang was present at the time such trades were executed. Moreover, Yang himself admitted that he signed the Sogotrade account opening document, and that the forms were submitted to Sogotrade from his email address. ( Id. at 793-95.) Despite Yang's concessions, he vehemently maintained that he had no control over the trades executed in the account. ( Id. at 877-78.) The jury apparently found that Yang's testimony in this regard was not believable; its verdict reflected the jurors' unanimous assessment that it was Yang who was responsible for the trading in the Yang/Fan account.

Courts adjudicating remedies in SEC enforcement actions have found that such demonstrable lack of candor is among the factors that presage future violations. See Holschuh, 694 F.2d at 145 (the defendant lacked candor and offered inconsistent positions at various stages of the proceedings); SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1478 (2d Cir. 1996)(the defendant's testimony was "belligerently evasive"); SEC v. Gunn, 3:08-CV-1013, 2010 WL 3359465, at * 6 (N.D. Tex. Aug. 25, 2010) ("[I]f a defendant is dishonest, exhibits a lack of candor, or offers inconsistent testimony during the course of the action, an injunction is more likely to be warranted.").

In the final analysis, both the jury's finding that Yang committed securities fraud and the supporting evidence elicited at trial reflect a high degree of likelihood of his future securities law violations. Accordingly, this Court should issue an order permanently enjoining Yang from violating the securities laws for which the jury found him liable.


Yang should be required to disgorge the profits he made owing to his front-running. SEC v. Jakubowski, No. 94 C 4539, 1997 WL 598108, at *2 (N.D. Ill. Sept. 19, 1997); SEC v. Randy, 38 F.Supp.2d 657, 674 (N.D. Ill. 1999). This Court enjoys broad authority to order such disgorgement. Jakubowski, 1997 WL 598108, at *2. "The SEC is only required to show that the amount of disgorgement is a reasonable approximation' of the profits that the defendant reaped from his wrongful conduct." Randy, 38 F.Supp.2d at 674. The burden then shifts to the defendant to demonstrate that the approximation is not accurate. Id. Throughout such burden shifting, however, "the risk of uncertainty [in calculating disgorgement] must generally fall on the defendants, whose illegal conduct created the uncertainty in the first instance." SEC v. Antar, 97 F.Supp.2d 576, 578-79 (D.N.J. 2000); SEC v. Great Lakes Equities Co., 775 F.Supp. 211, 214 (E.D. Mich. 1991), aff'd, 12 F.3d 214 (6th Cir. 1993) ("[A]ll doubts concerning the determination of disgorgements are to be resolved against the defrauding party") (internal quotation marks omitted).

Here, Yang's disgorgement amounts to $151, 432, as established in the declaration of SEC accountant John Kustusch. (Ex. 1 ¶¶ 8-10). This sum constitutes a reasonable calculation of Yang's ill-gotten gains, as it reasonably approximates the profits he personally made ...

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