Sec. & Exch. Comm'n v. Chan

• Decision Date: 08 June 2020
• Docket Number: Civil Action No. 16-cv-11106-ADB
• Citation: 465 F.Supp.3d 18
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Schultz CHAN (a/k/a Jason Chan), Defendant.
• Court: U.S. District Court — District of Massachusetts

465 F.Supp.3d 18

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Schultz CHAN (a/k/a Jason Chan), Defendant.

Civil Action No. 16-cv-11106-ADB

United States District Court, D. Massachusetts.

Signed June 8, 2020

Charles D. Riely, Charu A. Chandrasekhar, David Oliwenstein, Pro Hac Vice, Lee A. Greenwood, Simona Suh, U.S. Securities and Exchange Commission New York Regional Office, New York, NY, Martin F. Healey, Securities and Exchange Commission, Boston, MA, for Plaintiff.

Matthew J. Tuttle, Pinkham Busny LLP, Woburn, MA, Peter C. Horstmann, Law Offices of Peter Charles Horstmann, Newton, MA, for Defendant.

MEMORANDUM AND ORDER ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

BURROUGHS, D.J.

This SEC action arises out of a government investigation of an insider trading scheme involving publicly traded shares of the Massachusetts-based biopharmaceutical company Akebia Therapeutics, Inc. ("Akebia"). In a related criminal case, Defendant Schultz Chan ("Chan"), and his codefendant Songjiang Wang ("Wang"), were, inter alia, convicted of orchestrating an insider trading and tipping scheme that lasted from November 2013 to September 2015. Both the criminal and civil cases are based, at least in part, on Chan purchasing his employer's stock and advising Wang to do the same while Chan was in possession of insider information concerning the results of Akebia's clinical trials. [ECF No. 34 ¶ 11; ECF No. 35-2 ¶ 6; ECF No. 42-1 at 15].

Pending before the Court is the SEC's motion for summary judgment. [ECF No. 32]. For the following reasons, the motion, [ECF No. 32], is GRANTED.

I. BACKGROUND

A. Factual Background

The following facts are either uncontroverted pursuant to Federal Rule of Civil Procedure 56 and Local Rule 56.1, or stated in the light most favorable to the non-movant on each issue. On August 17, 2015, Chan was hired as Akebia's Director of Biostatistics. [ECF No. 34 ¶ 18]. At that time, Wang was the Director of Statistical Programming at Merrimack Pharmaceuticals, Inc. ("Merrimack"). [Id. ¶ 9]. Akebia's Insider Trading Policy mandated that "no employee was permitted to trade the company's stock while in possession of material nonpublic information, and that no employee was permitted to disclose material nonpublic information to others who might buy or sell securities on the basis of that information." [Id. ¶ 13]. Merrimack employed a similar policy. [ECF No. 34 ¶¶ 12–13]. Wang violated Merrimack's policy when he shared Merrimack's material nonpublic information with Chan, who then purchased Merrimack stock. [ECF No. 35-2 ¶ 24]. The Merrimack trades were charged in the criminal case, but not the civil one.

Relevant to this civil action, Chan purchased nearly 14,000 shares of Akebia stock before the company announced in September 2015 that its drug candidate Vadadustat had achieved positive results in a clinical trial, [ECF No. 34 ¶¶ 15–16, 20–22], and instructed his wife¹ and Wang² to do the same, [id. ¶ 24]. Following this announcement, on September 8, 2015, the share price of Akebia's stock increased by forty-five percent, [id. ¶ 14], resulting in a gain of approximately $68,699.00 for Chan.^{3 ,4} [Id. ¶¶ 14, 23].

The Government filed a criminal complaint against Chan and Wang in the District of Massachusetts on June 13, 2016, based on their trading activity. [ECF No. 33 at 6]. On June 5, 2018, Chan was charged in a four-count second superseding indictment ("SSI") with (1) conspiracy to commit securities fraud; (2) insider trading related to Chan's trading in Merrimack securities; (3) insider trading related to Wang's trading in Akebia securities; and (4) insider trading related to Chan's trading in Akebia securities. [ECF No. 35-2 at 9–15]. On July 10, 2018, Chan was convicted on all four counts and sentenced to a term of thirty-six months’ imprisonment, a $65,000.00 fine, and restitution of $153,428.72. [Id. ].⁵ The court in the criminal proceeding did not order the forfeiture of Chan's profits.⁶ [Id. at 7]. Chan's appeal of his conviction is currently pending. [Id. ].

B. Procedural History

On June 14, 2016, one day after the Government filed its criminal complaint against Chan, the SEC filed the instant civil complaint ("the Complaint"). [ECF No. 1; ECF No. 33 at 6]. According to the SEC, the Complaint "is based on the same factual allegations" as Counts Three and Four of the SSI. [Id. ]. This Court stayed the civil proceeding during the pendency of the parallel criminal action. [ECF No. 10].

On June 13, 2019, following the resolution of the criminal case, the Court granted the SEC's motion to lift the stay on the instant civil proceeding, [ECF No. 21], and the SEC filed its motion for summary judgment, which Chan opposed, [ECF No. 32; ECF No. 42].

II. LEGAL STANDARD

Summary judgment may be granted where the moving party shows "that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A fact is material where it "affect[s] the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine issue of material fact arises if "the evidence with respect to the material fact in dispute ‘is such that a reasonable jury could return a verdict for the nonmoving party.’ " SEC v. Weed, 315 F. Supp. 3d 667, 673 (D. Mass. 2018) (quoting Anderson, 477 U.S. at 248, 106 S.Ct. 2505 ).

If the moving party demonstrates that there is no genuine dispute of material fact, the burden shifts to the non-moving party to "set forth specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 250, 106 S.Ct. 2505 (quoting Fed. R. Civ. P. 56(e) ). The Court views "the record in the light most amiable to the nonmovants and indulge[s] all reasonable inferences favorable to them." Garside v. Osco Drug, Inc., 895 F.2d 46, 48 (1st Cir. 1990). The granting of summary judgment is "appropriate if, after viewing the record in the non-moving party's favor, the Court determines that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law." Weed, 315 F. Supp. 3d at 673.

III. DISCUSSION

The SEC contends that Chan is collaterally estopped from disputing the facts that formed the basis of his criminal conviction, which are sufficient to prove the violations alleged in the Complaint. [ECF No. 33 at 8, 10–13]. Collateral estoppel, or issue preclusion, "bars parties from re-litigating issues of either fact or law that were adjudicated in an earlier proceeding" where the current litigation involves a party to the earlier proceeding. Robb Evans & Assocs., LLC v. United States, 850 F.3d 24, 31 (1st Cir. 2017). The party that seeks to invoke collateral estoppel must establish

(1) the issue sought to be precluded in the later action is the same as that involved in the earlier action; (2) the issue was actually litigated; (3) the issue was determined by a valid and binding final judgment; and (4) the determination of the issue was essential to the judgment.

Ramallo Bros. Printing, Inc. v. El Dia, Inc., 490 F.3d 86, 90 (1st Cir. 2007).

"It is well established that a prior criminal conviction may work an estoppel in favor of the Government in a subsequent civil proceeding."⁷ Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 568, 71 S.Ct. 408, 95 L.Ed. 534 (1951).

Therefore, "it is appropriate to estop a party from relitigating issues actually and necessarily decided as part of a prior criminal judgment and conviction, in part because ‘[t]he government bears a higher burden of proof in the criminal than in the civil context.’ " SEC v. Namer, No. 97-cv-02085, 2004 WL 2199471, at *4 (S.D.N.Y. Sept. 30, 2004) (citing Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 43 (2d Cir. 1986) ), aff'd, 183 F. App'x 120 (2d Cir. 2006) ; see also Weed, 315 F. Supp. 3d at 674 ("It is well-settled that a criminal conviction, whether by a jury verdict or guilty plea, constitutes estoppel in favor of the [Government] in a subsequent civil proceeding as to those matters determined by judgment in the criminal case." (quoting United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978) )).

A. Chan's Defenses

Chan argues that collateral estoppel is inappropriate in this case because (1) he has appealed his criminal conviction, (2) there were alleged errors at trial, and, (3) the Government presented inconsistent theories at trial.

1. Chan's Pending Appeal

Chan argues that it would be inappropriate for this Court to grant summary judgment in reliance on the criminal conviction because that criminal conviction is currently pending appeal. [ECF No. 42 at 2–4].

"The pendency of a criminal appeal or habeas petition seeking post-trial relief ‘generally does not deprive a criminal judgment of its preclusive effect.’ " Weed, 315 F. Supp. 3d at 674 (quoting United States v. Int'l Bhd. of Teamsters, 905 F.2d 610, 621 (2d Cir. 1990) ). "The general rule applies—in most jurisdictions—even where the first, or issue preclusive, judgment is still on appeal when the second action occurs." In re Kane, 254 F.3d 325, 328 (1st Cir. 2001) (first citing Ruyle v. Cont'l Oil Co., 44 F.3d 837, 846 (10th Cir. 1994), and then citing Bartlett v. Pullen, 586 A.2d 1263, 1265 (Me. 1991) ); see also Huron Holding Corp. v. Lincoln Mine Operating Co., 312 U.S. 183, 188–89, 61 S.Ct. 513, 85 L.Ed. 725 (1941) ("[T]he general rule has long been recognized that while appeal with proper supersedeas stays execution of the judgment, it does not—until and unless reversed—detract from its decisiveness and finality.").

The SEC is routinely granted summary judgment on a defendant's liability in civil actions where a defendant has appealed the underlying criminal action that has determined the defendant's guilt. See, e.g., SEC v. Resnick, 604 F. Supp. 2d 773, 779 (D. Md. 2009) (explaining that the fact that the defendant had "appealed his criminal conviction d[id] not affect the finality of that judgment for purposes...