Sec. & Exch. Comm'n v. Yang

Decision Date28 July 2015
Docket NumberNo. 14–2636.,14–2636.
PartiesSECURITIES AND EXCHANGE COMMISSION, Plaintiff–Appellee, v. Siming YANG, Defendant–Appellant.
CourtU.S. Court of Appeals — Seventh Circuit

Benjamin M. Vetter, Dominick V. Freda, Attorney, Securities and Exchange Commission Office of the General Counsel, Washington, DC, for PlaintiffAppellee.

James J. Moylan, Attorney, James J. Moylan and Associates, P.C., Steamboat Springs, CO, James A. McGurk, Attorney, Ten S. LaSalle Street, Chicago, IL, for DefendantAppellant.

Before WOOD, Chief Judge, and BAUER and RIPPLE, Circuit Judges.

Opinion

WOOD, Chief Judge.

Just before investing in Zhongpin (a Chinese company) on behalf of Prestige Trade Investments, Siming Yang purchased both shares and option contracts for Zhongpin's stock for his personal use. Taking the position that this was deceptive “front-running,” the U.S. Securities and Exchange Commission (SEC) instituted this civil suit against Yang. The jury found that Yang had violated the law both by front-running and by filing a fraudulent disclosure form. As relief, the district court imposed a $150,000 civil penalty and issued a permanent injunction barring Yang from future violations of U.S. federal securities law. Yang appeals both the finding of violations and the propriety of the injunction. We affirm both aspects of the district court's judgment.

I

Yang is a Chinese citizen who works in investment research. While employed at an investment advisory firm in the United States, he formed Prestige under the laws of the British Virgin Islands. Yang funded Prestige with capital from several Chinese investors, including himself. Yang was Prestige's only officer and employee and acted as its sole investment manager.

Yang's dealings with the stock of Zhongpin, a Delaware corporation that processes pork products in China, form the basis of this lawsuit. During the relevant period, Zhongpin's common stock was traded on the NASDAQ exchange, and options contracts for its stock were traded on the Chicago Board of Options Exchange (CBOE). The company was registered with the SEC pursuant to Section 12(b) of the Securities Exchange Act (Exchange Act). See 15 U.S.C. § 78l (b).

Between March 15 and March 23, 2012, Prestige (at Yang's instruction) purchased 3,194,893 shares of Zhongpin common stock. Before he did so, Yang purchased 2,878 Zhongpin call options and 50,000 shares of Zhongpin common stock on March 14 and 15, 2012, through a SogoTrade account that he had opened jointly with Chinese citizen Caiyan Fan. In the district court, Yang argued that he was not the person who made these purchases; he has not pursued this contention on appeal, however, and so that defense is waived. Yang did not disclose these purchases to Prestige.

After its purchases were completed, Prestige owned more than five percent of Zhongpin's common stock; this triggered an obligation under federal securities law to file a Schedule 13D form disclosing its ownership. See Section 13(d) of the Exchange Act, 15 U.S.C. § 78m(d). Yang and two other people associated with Prestige (all listed as “Reporting Persons” on the form) filed an original and amended Schedule 13D on behalf of the company. Both forms disclosed that Yang had shared voting and dispositive power over the Zhongpin shares that Prestige had recently purchased, but they failed to list the shares that Yang had purchased for his own benefit, as required by Section 13(d) and SEC Rule 13d–1, 17 C.F.R. § 240.13d–1. The original Schedule 13D misleadingly stated that, except for the transactions listed on the form, “no transactions in the Common Stock were effected by any Reporting Person” in the 60 days prior to Prestige's attainment of a five percent interest in Zhongpin.

These events prompted the SEC to file suit against Yang and Prestige, alleging that both had engaged in insider trading in violation of Exchange Act Section 10(b), 15 U.S.C. § 78j(b), and SEC Rule 10b–5, 17 CFR § 240.10b–5. The SEC also alleged that Yang had violated Section 10(b), Rule 10b–5, and Section 206 of the Investment Advisers Act (Advisers Act), 15 U.S.C. § 80b–6, by engaging in front-running, a practice that involves trading for one's personal gain in advance of trades for one's client. Finally, the SEC contended that Yang's failure to include his personal purchases of Zhongpin stock in the Schedule 13D that he filed on behalf of Prestige constituted a violation of the reporting requirements in Exchange Act Section 13(d) and SEC Rule 13d–1. Thus, the SEC asserted, Yang's filing of the form was fraudulent or deceptive for purposes of Section 10(b) and Rule 10b–5(b).

A jury found that Yang had violated the law by engaging in front-running and by failing to disclose his personal purchases on the Schedule 13D. It rejected the SEC's claims that Yang and Prestige had failed to comply with the insider-trading rules. Yang then moved for judgment as a matter of law or a new trial, relying on the theory that the jury could not reasonably have concluded that Yang was the person who made the trades in the SogoTrade account. Finding that the evidence was sufficient to support the verdict, the court denied the motion. After considering Yang's awareness of wrongdoing, the lack of harm resulting from his actions, and some of his recent trading activity, the court issued a permanent injunction prohibiting Yang from violating federal securities law. It also imposed a $150,000 civil penalty.

Yang's appeal challenges both the jury's verdict and the permanent injunction. He raises four principal arguments: 1) the district court lacked jurisdiction because of the foreign nature of Yang's activities; 2) front-running does not constitute a violation of federal securities law; 3) his failure to disclose his personal purchases of Zhongpin stock in Schedule 13D was not a material omission; and 4) the district court abused its discretion in issuing a permanent injunction.

II
A

We first discuss Yang's arguments about the authority of the court to act in this case, given his own nationality and that of his company.

Yang casts this as an argument that the court lacked jurisdiction over him under the Exchange Act and the Advisers Act. He asserts that these statutes do not reach his actions, because he is a citizen of China, Prestige is organized under the laws of the British Virgin Islands, and its owners are all Chinese. There was some dispute at oral argument over the question whether this is a challenge to subject-matter jurisdiction or merely an argument that there was a lack of legislative authority to regulate Yang's actions (and thus that the SEC had failed to state a claim). If it is the former, we would be able to reach the issue even if it had not been raised in the district court; if the latter, we could not address the argument on appeal unless it was properly preserved. See Arbaugh v. Y & H Corp., 546 U.S. 500, 513–15, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006). Because Yang did raise the issue in the district court, we do not need to resolve this point; we can address the argument whether the claim is truly jurisdictional or not.

Section 206 of the Advisers Act provides that district courts have jurisdiction over actions brought by the SEC relating to “conduct within the United States that constitutes significant steps in furtherance of the violation, even if the violation is committed by a foreign adviser and involves only foreign investors.” 15 U.S.C. § 80b–14(b)(1). Yang purchased shares of common stock (and options contracts for that stock) of Zhongpin, which as we have noted is incorporated in Delaware and at the time was traded on NASDAQ and the CBOE. Trades involving stocks or option contracts for stock of U.S. companies made on U.S. exchanges easily qualify as “conduct within the United States,” regardless of the citizenship of the purchaser. This activity, moreover, was essential to the alleged violations: Yang could not have engaged in front-running without making these trades.

Yang argues that the maintenance of this suit would violate the principles underlying Morrison v. Nat'l Australia Bank Ltd., 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010), where the Supreme Court limited the extraterritorial reach of Section 10(b) of the Exchange Act. See id. at 265, 130 S.Ct. 2869. But even assuming that Morrison applies to the Advisers Act, its reasoning does not help Yang. The Morrison Court found that Section 10(b) extends to “the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” Id. at 273, 130 S.Ct. 2869. Yang's purchase of Zhongpin stock, “a security listed on an American stock exchange,” falls comfortably within that scope. Thus, Morrison actually supports the conclusion we now reach: both the Advisers Act and Section 10(b) of the Exchange Act can be applied to Yang's purchases of Zhongpin securities.

B

Yang next argues that front-running is not a violation of either the Exchange Act or the Advisers Act. Unfortunately for him, this is an afterthought. Yang did not make this argument in the district court either at trial or in his motions under Federal Rule of Civil Procedure 50 ; he has therefore forfeited it on appeal. Cf. Unitherm Food Sys., Inc. v. Swift–Eckrich, Inc., 546 U.S. 394, 404–05, 126 S.Ct. 980, 163 L.Ed.2d 974 (2006) (litigant forfeited right to seek a new trial on appeal because it did not seek a new trial in the district court); Cone v. W. Va. Pulp & Paper Co., 330 U.S. 212, 215–17, 67 S.Ct. 752, 91 L.Ed. 849 (1947) (finding that “a party's failure to make a motion in the District Court for judgment notwithstanding the verdict, as permitted in Rule 50(b), precludes an appellate court from directing entry of such a judgment”). As we have noted, Yang did file a Rule 50(b) motion in which he objected to the jury's verdict on...

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