Sec. & Exch. Comm'n v. Lemelson
| Decision Date | 06 April 2021 |
| Docket Number | Civil Action No. 18-11926-PBS |
| Citation | 532 F.Supp.3d 30 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Gregory LEMELSON and Lemelson Capital Management, LLC, Defendants, and The Amvona Fund, LP, Relief Defendant. |
| Court | U.S. District Court — District of Massachusetts |
Alfred A. Day, Marc J. Jones, United States Securities and Exchange Commission, Boston, MA, for Plaintiff.
Douglas S. Brooks, Brian J. Sullivan, Libby Hoopes Brooks, P.C., Boston, MA, for Defendants.
Saris, D.J.
This dispute centers on an enforcement action brought by the United States Securities and Exchange Commission (SEC) against defendants Gregory Lemelson; Lemelson Capital Management, LLC (LCM); and the Amvona Fund, LP. The SEC alleges that defendants Lemelson and LCM violated Section 10(b) of the Exchange Act and Rule 10b-5 and Section 206(4) of the Advisers Act and Rule 206(4)-8. Specifically, the SEC claims that the defendants engaged in an unlawful "short-and-distort scheme" involving fraudulent, deceptive, or manipulative conduct. Dkt. 131 at 4. The SEC brings separate claims based on theories of unjust enrichment and constructive trust against the Amvona Fund.
The defendants have moved for summary judgment, arguing that the SEC has not met its burden on either the alleged Rule 10b-5 violation or the alleged Rule 206(4)-8 violation. The SEC, in turn, has moved for partial summary judgment, seeking dismissal of the defendants’ affirmative defense of selective enforcement.
For the reasons set forth below, the Court DENIES the defendants’ motion for summary judgment (Dkt. 124) and ALLOWS the SEC's motion for partial summary judgment (Dkt. 121).
The following facts are taken from the parties’ statements of material fact and the associated exhibits. Except as otherwise noted, the facts are undisputed.
LCM is the investment adviser to the Amvona Fund. In 2014, through the Amvona Fund, Lemelson took a short position in shares of the stock of Ligand Pharmaceuticals, Inc. (Ligand). Between June 2014 and October 2014, Lemelson participated in interviews and authored several research reports concerning Ligand. Four statements from these interview appearances and reports are now challenged by the SEC as fraudulent misrepresentations.
After taking the short position in Ligand, Lemelson published a 25-page report expressing his opinion that Ligand's stock was overvalued. Lemelson based this theory on his belief that demand for Promacta, Ligand's largest royalty-generating asset, would soon be eliminated by competitor drugs. Specifically, he theorized that the Hepatitis C drug Sovaldi would soon replace Promacta, which is in part used as a supportive therapy for Hepatitis C patients. The SEC alleges that Promacta and Sovaldi are not direct competitors because Promacta does not treat Hepatitis C.
Two days later, Ligand's Investor Relations representative Bruce Voss contacted Lemelson by phone to discuss the report. Accounts of the substance of the phone conversation are disputed. Prior to the conversation, Voss had been advised via email by Ligand's CEO, John Higgins, to not "jump into content or a rebuttal" with Lemelson. Dkt. 127-9 at 1. Voss testified, however, that during the call he in fact actively rebutted Lemelson's theory that Promacta would be squeezed out of the market. See Dkt. 133-2 at 18 (). Lemelson, meanwhile, indicated in notes taken after the call that Voss "said the company [Ligand] agreed that Gilead's drug would eliminate the need for Promacta and understood that." Dkt. 127-12 at 2. In support of this conclusion, Lemelson relies on the fact that, during the call, Lemelson had stated that Promacta was going away and asked Voss, "don't you agree?"—a question to which Voss responded with silence. Dkt. 126 ¶¶ 18–20. Voss, for his part, explained that he had interpreted Lemelson's phrase "don't you agree" as a "personal tick" and a rhetorical question. See Dkt. 127-10 at 18. In either case, Higgins emailed Voss afterwards, implying that Voss had "tacit[ly] agree[d]" with Lemelson that Promacta was basically going away. Dkt. 127-13 at 1.
The next day, on June 19, 2014, Lemelson was interviewed by a radio outlet called Benzinga. In one of the statements that is now challenged by the SEC, Lemelson claimed during the interview that Ligand's Investor Relations representative had "basically agreed" that Promacta was going away. Dkt. 127 ¶ 15. During the interview, Lemelson repeatedly referred to "the Ligand short." Dkt. 132 at 10. Ligand's stock price fell during, and immediately in the aftermath of, the interview.
Viking Therapeutics (Viking) is a start-up company with which Ligand had entered into a licensing agreement. At the time of the closing of the Viking-Ligand transaction, Ligand had taken an approximately 50% stake in Viking. Lemelson did not hold a short position in Viking at this time.
On July 1, 2014, Viking released a Form S-1.1 In a July 3, 2014 report, Lemelson cited the Form S-1 for the proposition that Viking had Dkt. 127-15 at 10. He further claimed that, based on Viking's public filings, Viking "does not intend to conduct any preclinical studies or trials." Dkt. 127-15 at 7. Lemelson had expressed in the report that LCM was short shares of Ligand stock.
In the July 1, 2014 Form S-1, Viking had in fact expressed that its 2013 financial information was derived from "audited financial statements included elsewhere in this prospectus." Dkt. 127-19 at 8. The Form S-1 also expressly explained that Viking expected to enlist third parties to perform clinical trials for a variety of its drugs. See, e.g., Dkt. 127-19 at 6 ; Dkt. 133-24 at 2 (). On the basis of the July 1, 2014 Form S-1, the SEC challenges as false and misleading Lemelson's July 3, 2014 statements about Viking's unaudited financials (Statement 2) and intention to conduct clinical trials (Statement 3).
In an August 14 report, Lemelson stated that Dkt. 127-23 at 2. He further stated that, Id.
Shortly thereafter, in an August 22 report, Lemelson wrote that Ligand had "issued $245 million in new debt against [Ligand's] tangible equity of just $21,000, giving rise to a debt to tangible equity ratio of 11,667-to-1 (that is to say, $11,667 dollars in debt for every $1 dollar in tangible common shareholder equity)." Dkt. 127-24 at 3. Similarly, he stated that Ligand's "shareholders have only the protection of $21,000 in tangible equity to shield them from $245 million in debt." Id. at 6. Both the August 14 and the August 22 reports disclosed that LCM had a short position in Ligand stock.
Ligand's CEO, John Higgins, stated in his deposition testimony that Ligand was not insolvent and had never been insolvent during his tenure with the company.
Lemelson alleges that several Ligand employees made mocking statements about him in email correspondence. For instance, he cites evidence that Ligand employees referred to Lemelson as "lamelson," "a quack," "slimy," and a "narcissistic psychopath." Dkt. 136-4 at 1; Dkt. 136-6 at 1; Dkt. 136-9 at 1.
As is relevant here, Lemelson also cites multiple examples showing that Ligand employees mocked his status as an ordained Orthodox priest. For instance, he cites an email chain in which one Ligand employee asked of Lemelson's actions, "does being a priest make that ok?" Dkt. 136-9 at 1. As another example, Lemelson points to an email in which Bruce Voss wrote, Dkt. 136-10 at 1.
On its website, the SEC maintains a publicly accessible "tips, complaints, and referrals" (TCR) system for persons with knowledge of potential violations of the securities laws to report relevant information. Ligand and its counsel filed two TCRs, one in 2014 and another in 2015. Before this case was filed, Ligand's representative and counsel met twice with the SEC Division of Enforcement staff regarding the two TCRs—once in September 2014 and again in June 2015. At the September 2014 meeting, Ligand representatives used a PowerPoint presentation which included photos of Lemelson in his priestly robes. This presentation accused Lemelson of engaging in an "affinity fraud." Dkt. 127-36 at 23.
In addition to the September 2014 and June 2015 meetings, Ligand's counsel also communicated with SEC staff by email and telephone between September 2014 and March 2018. Ligand's counsel asked the SEC for updates on the investigation into Ligand, but the SEC staff informed Ligand's counsel that they could not provide any detailed information about the...
To continue reading
Request your trial