U.S. Securities and Exchange Commission v. Yang et al

Filing 266

MOTION by Plaintiff U.S. Securities and Exchange Commission for judgment and Remedies as to Defendant Siming Yang (Polish, Jonathan)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
________________________________________________
:
SECURITIES AND EXCHANGE COMMISSION, :
:
Plaintiff,
:
:
v.
:
:
SIMING YANG, PRESTIGE TRADE
:
INVESTMENTS LIMITED, CAIYIN FAN
:
SHUI CHONG (ERIC) CHANG
:
:
Defendants.
:
_______________________________________________ :

Case No. 12-cv-02473
Hon. Matthew F. Kennelly

PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S MOTION FOR
REMEDIES AND FINAL JUDGMENT AGAINST DEFENDANT SIMING YANG
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”).

1

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.

2

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).
I.

THE COURT SHOULD PERMANENTLY ENJOIN YANG
FROM VIOLATING THE SECURITIES LAWS OF WHICH THE
JURY FOUND HIM LIABLE.
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
1

Courts adjudicating a defendant’s likelihood of future violations have considered such
factors as (1) the gravity of harm caused by the offense; (2) the extent of the defendant’s
participation and his degree of scienter; (3) the isolated or recurrent nature of the infraction
and the likelihood that the defendant’s customary business activities might again involve
him in such transactions; (4) the defendant’s recognition of his own culpability; and (5) the
sincerity of his assurances against future violations. Holschuh, 694 F.2d at 144. The
Commission need not establish the existence of any one factor, however, in order to
demonstrate a likelihood of future violations. SEC v. Church Extension, Inc., 429 F. Supp. 2d
1045, 1048 (S.D. Ind. 2005).
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(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

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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.

5

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.”).

6

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.
II.

THE COURT SHOULD ORDER YANG TO DISGORGE HIS
ILL-GOTTEN GAINS FROM HIS FRONT-RUNNING,
WITH PREJUDGMENT INTEREST.
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 buying and selling in Zhongpin securities during the relevant timeframe.

7

Yang’s actual gains precisely traceable to his malfeasance might have been
somewhat more or somewhat less than $150,000 depending upon various intervening
market-moving events. Such events could have goosed Yang’s profits above and beyond the
impact of Prestige’s purchases of the stock. Or such events could have hurt the price of
Zhongpin securities, in which case Yang’s front-running alone caused $150,000 in profits.
The SEC has not commissioned an expensive, time-consuming events study to
analyze such variables. Nor is that a prerequisite for Court-ordered disgorgement of illgotten gains in an SEC enforcement action. And for good reason. As the Third Circuit
noted in SEC v. Teo, such a requirement would contravene the well-established proposition
that “in proving Section 13(d) and 10(b) violations, the Commission need not prove
reliance, nor must it show that any investor lost money as a result of the violation.” SEC v.
Teo, --- F.3d ----, 2014 WL 503455, at *9 (3rd Cir. Feb. 10, 2014). This reality – together with
the “economic and social policies” served by SEC enforcement actions – underlies the
SEC’s “reasonable approximation” standard for disgorgement. Id. See also SEC v. First City
Financial Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989) (“If exact information were obtainable
at negligible cost, we would not hesitate to impose upon the government a strict burden to
produce that data to measure the precise amount of the ill-gotten gains. Unfortunately, we
encounter imprecision and imperfect information. Despite sophisticated econometric
modelling, predicting stock market responses to alternative variables is, as the district court
found, at best speculative. Rules for calculating disgorgement must recognize that separating
legal from illegal profits exactly may at times be a near-impossible task.”); SEC v. Sierra
Brokerage Services, Inc., 608 F. Supp. 2d 923, 970 (S.D. Ohio 2009) (“Courts are not required
to engage in counterfactual scenarios to speculate about how much a defendants’ disclosure

8

violation inflated the market price of a security. . . . The SEC’s calculation is . . . a
reasonable approximation of the profits causally related to the Promoter Defendants’
violations.”) (citations omitted); SEC v. Bilzerian, 814 F. Supp. 116, 121 (D.D.C. 1993) (“In
many cases, separating legal from illegal profit is difficult. This is due to the inherent
difficulty in predicting stock price responses to alternative variables. That is, separating price
appreciation due to illicit activities from price appreciation which would have otherwise
occurred is nearly impossible.”) (citations omitted).2 Mr. Kustusch’s straightforward
calculation based on the price of Zhongpin securities during the relevant period constitutes a
reasonable approximation of Yang’s ill-gotten gains.
Yang should also pay prejudgment interest on the disgorged profits. The imposition
of prejudgment interest “prevents a defendant from obtaining the benefits of what amounts
to an interest free loan procured as a result of illegal activity.” Jakubowski, 1997 WL 598108,
at *2. Prejudgment interest is generally calculated according to the underpayment rate
published by the Internal Revenue Service. See, e.g. SEC v. Koenig, 532 F. Supp. 2d 987, 995
(N.D. Ill. 2007). As of February 28, 2014, based on a disgorgement amount of $151,432,
prejudgment interest amounted to $8,911.59. The methodology for this calculation is set
forth in Paragraph 11 of the Kustusch Declaration. (Ex. 1 ¶ 11.)
2

Of course, Yang is free to offer a causation analysis. But as made clear in Teo, he would
face a high hurdle: “The Appellants also asserted that the Best Buy tender offer was the
direct, intervening cause of their profits. However, it was the Appellants’ burden to provide
the District Court with evidence that the SEC’s approximation of profits was unreasonable.
This burden is not simply one of carrying the ball back across the fifty-yard line by
presenting a merely plausible alternative explanation for the profit. Rather, the defendant
must adduce—at a minimum—specific evidence explaining the interplay (or lack thereof)
among the violation(s) at issue, the market valuation of the stock at fixed points in time, and
any other cause for the profits they assert were untainted by illegality. In so doing, they must
account for the ambiguities, uncertainties and myriad market forces inherent to any analysis
of fluctuations in stock pricing to credibly demonstrate the unreasonableness of the
government’s proposed disgorgement.” Teo, 2014 WL 503455, at *13 (footnotes omitted).
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III.

THE COURT SHOULD IMPOSE SUBSTANTIAL CIVIL PENALTIES
AGAINST YANG.
Pursuant to Section 21(d)(3) of the Exchange Act and Section 209(e) of the Advisers

Act, federal courts are authorized to impose monetary penalties for securities law violations.
Civil penalties serve to protect investors and maintain the integrity of the nation’s securities
markets. See S. Rep. No. 101-337, 101st Cong., 2d Sess. 2 (1990). Standing alone, the
disgorgement remedy “merely requires the return of wrongfully obtained profits; it does not
result in any actual economic penalty or act as a financial disincentive to engage in
securities fraud.” Jakubowski, 944 F. Supp. at 296 (quoting congressional legislative history
regarding civil penalties provisions). By contrast, the imposition of civil penalties punishes the
securities law violator while also deterring future violations. Id.
The Securities Act and the Advisers Act set forth three tiers for determining the
appropriate civil penalty amounts:3
TIER

MAXIMUM PENALTY
IS THE HIGHER OF

(1) $7,5000 for a natural person or
$75,000 for any other person; or
FIRST TIER

ADDITIONAL REQUIREMENTS
FOR APPLICATION OF
2ND AND 3RD TIERS

n/a

(2) the gross amount of pecuniary
gain to such defendant as a result
of the violation.

3

The applicable penalty amounts are periodically adjusted for inflation. The penalty
amounts set forth in this table apply to the timeframe when Yang’s violations occurred,
between March 3, 2009 and March 5, 2013. (See 17 C.F.R. §§201.1004 -201.1005 and, Table
IV to Subpart E.)
10

TIER

MAXIMUM PENALTY
IS THE HIGHER OF

(1) $75,000 for a natural person or
$375,000 for any other person; or
SECOND TIER

(2) the gross amount of pecuniary
gain to such defendant as a result
of the violation.

ADDITIONAL REQUIREMENTS
FOR APPLICATION OF
2ND AND 3RD TIERS

“fraud, deceit, manipulation, or
deliberate or reckless disregard of
a regulatory requirement.”

(1) $150,000 for a natural person
per violation or $725,000 for any
other person; or
THIRD TIER

(a) “fraud, deceit, manipulation,
or deliberate or reckless disregard
of a regulatory requirement;” and

(2) the gross amount of pecuniary
gain to such defendant as a result
of the violation.

(b) “such violation directly or
indirectly resulted in substantial
losses or created a significant risk
of substantial losses to other
persons.”

Civil penalties may be imposed for “each violation” of the securities laws. As
discussed below, in this case appropriate second tier and third tier penalties for each of
Yang’s violations amounts to $750,000.
The jury found that Yang’s false 13D filings violated two free-standing statutory
provisions: (1) the antifraud provision of the Exchange Act, Section 10(b); and
(2) the disclosure requirements of Exchange Act Section 13(d). For each statute, there were
two violations – one for each of the false Schedules 13D filed with the Commission.
Therefore, for Yang’s false Schedules 13D, the Commission seeks a civil penalty of
$300,000, an amount equal to a second tier penalty for four violations.

11

Second tier penalties are appropriate for the false filing claims in light of the jury’s
finding that Yang “committed a fraud in connection with his filing of the Schedule 13D
form.” (Id.) This finding comfortably conforms to the malfeasance for a second tier penalty,
that is, “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory
requirement.” 15 U.S.C. § 78u(d)(3).
For Yang’s front-running, the Commission seeks civil penalties equal to $450,000,
an amount equal to a third tier penalty for three violations. Yang’s front running was
comprised of myriad trades, but the SEC has not sought to construe each such purchase as
its own “violation” for penalties purposes. Instead, from these many trades three broad
categories have been identified for purposes of quantifying appropriate civil penalties for
Yang’s front-running: (1) Yang’s purchase of stock on March 14; (2) Yang’s purchase of call
options on March 14; and (3) Yang’s purchase of call options on March 15.
Third tier penalties are appropriate for Yang’s front-running because imbedded
within the jury verdict was a finding that he either “(a) employed a device, scheme, or
artifice to defraud Prestige or its clients, or (b) engaged in transactions, practices, or courses
of business that operated as a fraud or deceit upon Prestige or its clients.” (Jury Instructions,
ECF No. 243, pp. 10-11.) This finding reflects the requisite “fraud, deceit, manipulation, or
deliberate or reckless disregard of a regulatory requirement” for third tier penalties. 15
U.S.C. § 80b-9(e). The jury verdict also satisfies the other requirement for third tier
penalties, that is, that “such violation directly or indirectly resulted in substantial losses or
created a significant risk of substantial losses to other persons.” Id. The jury necessarily
found that Yang knowingly purchased stock in order to “obtain a personal financial benefit

12

without disclosing to Prestige the purchases and the conflict of interest created by the
purchases.” (Jury Instructions, ECF No. 243, pp. 11-12.)
The Court enjoys broad discretion to assess civil penalties. See 15 U.S.C. § 78u(d)(3).
To determine appropriate penalties, a court may consider the need for deterrence;
defendant’s acceptance of responsibility; defendant’s net worth; the flagrancy of his
violation; and other sanctions already imposed for the same conduct. SEC v. Michel, 06 C
3166, 2008 WL 516369 (N.D. Ill. Feb. 22, 2008). These factors weigh decidedly in favor of
significant penalties – particularly considering the flagrance and degree of Yang’s
malfeasance. The jury found that Yang, a securities professional, engaged in widespread
deception for the express purpose of breaking the securities laws. To state the obvious,
securities professionals must be deterred from dishonesty in the purchase and sale of
securities.
This is all the more true for Yang given his lack of contrition for, or even so much as
his simple acknowledgment of, his misconduct. There can be no doubt that going forward,
Yang will continue focusing his undivided attention on the buying and selling of securities.
Given this certainty, the Court’s message to Yang in the wake of the jury verdict must be
clear and unmistakable. Such a message includes as a necessary ingredient civil penalties
well in excess of Yang’s ill-gotten gains.

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CONCLUSION
For these reasons, the Court should order (a) a permanent injunction corresponding
with the securities law violations that were the subject of the jury’s finding of liability;
(b) disgorgement of $151,432; (c) prejudgment interest of $8,911.59; and (d) civil monetary
penalties of $750,000 – $450,000 for front-running (a third tier penalty for each of three
violations) and $300,000 from the false Schedule 13D filings (a second tier penalty for each
of four violations).
Dated: February 24, 2014
Respectfully submitted,
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
/s/ Jonathan S. Polish
Jonathan S. Polish
U.S. Securities & Exchange Commission
175 West Jackson Blvd., Suite 900
Chicago, IL 60604
Phone: [phone]

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EXHIBIT 1