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Securities and Exchange Commission v. Williky

United States Court of Appeals, Seventh Circuit

November 8, 2019

Securities and Exchange Commission, Plaintiff-Appellee,
Gary S. Williky, Defendant-Appellant.

          Submitted September 16, 2019 [*]

          Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 1:15-cv-00357-WTL-MJD - William T. Lawrence, Judge.

          Before Bauer, Brennan, and St. Eve, Circuit Judges.

          Bauer, Circuit Judge.

         Gary Williky appeals a judgment in favor of the Securities and Exchange Commission ("SEC") that followed a bifurcated settlement agreement regarding Williky's fraudulent conduct while working for the Indiana-based company Imperial Petroleum, Inc. ("Imperial"). This court addressed the details of Imperial's fraudulent scheme in United States v. Wilson, 879 F.3d 795 (7th Cir. 2018). Imperial fraudulently purchased finished biodiesel and resold it while claiming government incentives and tax-credits available to companies producing biodiesel from raw feedstock. Jeffery Wilson, Imperial's ex-CEO, hired Williky to artificially inflate Imperial's stock through a series of "wash and match trades" and "scalping" emails. In the 1990s, Williky similarly engaged in a pattern of "wash and match trades" for another company led by Wilson. As part of Imperial, Williky acquired millions of shares of its stock but failed to lawfully report his ownership levels when his shares surpassed five percent. At issue in this appeal is Williky's conduct once the Imperial fraud unraveled. By July 2011, Williky knew Imperial misrepresented the source of its biodiesel to investors and, by November, knew the complete extent of Imperial's fraud. Williky sold off the entirety of his Imperial shares by February 27, 2012, and avoided a loss of $798, 217.

         The SEC sued to permanently enjoin Williky from violating federal securities law, to enjoin Williky from acting as an officer or director of a public company, and to disgorge his financial gains. The SEC further sought to impose financial penalties, including a civil penalty for Williky's insider trading. Before Williky faced his deposition, he entered into a bifur- cated settlement with the SEC, conceding his involvement in the fraudulent scheme and agreeing that the district court would determine the financial remedies to be assessed. The SEC requested the statutory maximum civil penalty of $2, 394, 651 for insider trading, calculated as three times Williky's avoided losses. Williky objected, arguing that the SEC's proposed judgment ignored his cooperation with various governmental agencies investigating Imperial's fraud. The district court denied the request for the maximum civil penalty as excessive and entered a judgment of $1, 596, 434, equal to two times the avoided losses. On appeal, Williky argues that the judgment still ignores his cooperation as a whistleblower and is thus an abuse of discretion. We find that the district court adequately assessed the value of Williky's cooperation and affirm.

         I. BACKGROUND

         In 2009, Gary Williky entered into confidential negotiations with Imperial's ex-CEO Jeffery Wilson and accepted a financial public relations role with Imperial. In reality, Wilson hired Williky to artificially inflate Imperial's stock through illegal market manipulation. This was not the first time Wilson and Williky engaged in securities fraud. Williky's long-standing relationship with Wilson dated back to the 1990s. Williky settled a lawsuit with the SEC for illegal "wash and match trades" that he committed for another company led by Wilson. SEC v. Williky, et al., 94-cv-2088 (N.D. Tex.). Although Williky's involvement in the Imperial scheme is not directly at issue in this appeal, we recount some of his fraudulent activities as context for Williky's insider trading.

         Williky first sought to artificially raise Imperial's stock price by increasing its trading volume through "wash and match trades." Wash trades refer to trades that occur without a change in beneficial ownership. Match trades, or "matched orders/' are trades in which orders are entered with the knowledge that substantially equivalent orders will be made by the same or different person. These fraudulent tactics create a false perception of market activity that does not reflect the true supply and demand for the securities. Inflating the volume of trades attracts additional market participants and thereby artificially increases stock price. Williky used multiple brokerage accounts in his and his wife's names to conduct a series of at least twenty "wash and match trades" from March 4, 2010, to January 11, 2012. On many days within this time period, Williky was responsible for between 50% to 100% of Imperial's trading volume.

         Second, Williky personally sent out "scalping" emails touting the potential value of Imperial's stock without disclosing his own relationship to Imperial or his intention to contemporaneously sell Imperial stock. Williky sent these emails out to more than 200 recipients. In the days following the emails, Williky sold Imperial stock and earned profits of over $60, 000. During this time, Williky acquired millions of shares and at many points owned more than five percent of the company's stock without disclosing his ownership levels as required by federal securities law.

         By July 10, 2011, Williky learned that Imperial was lying to investors about its biodiesel production. Specifically, a confidential memo informed Williky that Imperial was using partially processed oil or fat to make biodiesel. This information directly contradicted representations Williky had previously made that the fuel came from raw feedstock. Moreover, a hedge fund informed Imperial that it would not invest since the production of biodiesel from such materials failed to qualify for the government incentives that Imperial claimed. By November 18, 2011, Williky learned the complete extent of Imperial's fraud after the new Imperial CEO, John Ryer, secretly recorded a conversation with the owner of Imperial's main suppler, Joe Furando. Ryer told Williky that Imperial was purchasing finished fuel from Furando's company and later provided Williky with the tape. While in possession of all this confidential information, Williky sold off the entirety of his shares by February 27, 2012, avoiding a loss of $798, 217.

         As he sold his shares, Williky contacted federal authorities with the hopes of becoming a whistleblower. However, though Williky believes he provided the critical information that toppled Imperial, the SEC presented evidence that it and other federal agencies believed the Imperial scheme was already unraveling. Williky anonymously called the Environmental Protection Agency on December 27, 2011, to discuss suspected wrongdoing without naming Imperial. Although Williky claims this led to the investigation of Imperial, the SEC began investigating Imperial as early as November 2011 and interviewed its first witness on January 23, 2012, weeks before Williky first reported Imperial's violations on March 13, 2012. Williky also contends that on this day he provided authorities with the confidential tape recording between Ryer and Furando, which he argues was the "smoking gun" that led to the indictment and conviction of several co-conspirators in the Imperial scheme. Furthermore, Williky says that as part of his productions to the SEC, he provided 36 documents that were ultimately used in Wilson's trial.

         On March 2, 2015, the SEC charged Williky with violating federal securities laws through market manipulation and insider trading. On August 10, 2015, the district court sua sponte administratively closed the case pending the resolution of the criminal actions related to the Imperial scheme. The case was reopened on January 19, 2017, but Williky did not file his answer to the complaint until February 21, 2017, only after the SEC had moved for a clerk's entry of default. Once discovery commenced, Williky objected to the deposition of himself and his wife because of scheduling issues that the district court found had "absolutely no basis." Finally, instead of facing his deposition, Williky entered into a bifurcated settlement with the SEC in which Williky would accept the SEC's proposed injunctions, and the district court would determine the financial remedies to be assessed against Williky based on the facts of the complaint.

         The SEC thereafter filed its motion for financial remedies, requesting the disgorgement of $2, 101, 334 in ill-gotten gains plus $427, 931 in prejudgment interest, along with a civil penalty for insider trading of at least $2, 394, 651. Williky objected to the request for a civil penalty at the statutory maximum of three times his avoided losses on the basis that it "completely ignore[d] his cooperation with multiple governmental agencies as well as his whistleblowing activities." The SEC argued Williky's claims of cooperation were exaggerated, but even if true, would not warrant a substantial reduction in the civil penalty. The district court found that the request for the maximum penalty was "excessive" and instead decided that a "penalty of $1, 596, 434, equal to two times the amount of disgorgement, is appropriate." The district court explained this was not the first time Williky had to settle a securities fraud dispute and that Williky had not taken responsibility for his actions by claiming he only committed insider trading because he was stressed and not thinking clearly. Finally, the district court found Williky's cooperation was "of limited value." Williky then filed a motion for reconsideration arguing the court did not accurately determine the extent ...

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