Is the SEC Complying with Liu On Disgorgement?

Insider trading has long been a focus for the Commission’s Enforcement Division. While the cases can be difficult to detect, over the years the agency had developed a huge data base and critical data analytics that often aid in fretting out large and small potential cases. When insider trading is found, the actions are brought. The difficult for the agency with these cases today may be compliance with the decision in Liu v. SEC, No. 18-1501 (decided June 22, 2020). There the Supreme Court defined disgorgement in terms of traditional equitable principles keyed to the return of the net wrongful amounts obtained rather than transferring the money to the U.S. Treasury, the traditional agency approach. The question is, are they? Consider the following:

In the Matter of Edmond Leung, Adm. Proc. File No. 3-19889 (July 21, 2020) is an action which names as Respondent, Mr. Leung, a manager at Sangamo Therapeutics, Inc. He was employed in the technology department during the period here. In early August 2016 he became aware of a delay of clinical trials at the firm for a particular drug. On August 3, 2016, just before the announcement, he sold 1,439 shares of Sangamo stock. The same day the firm announced a delay in the trials. The share price fell 33%. Mr. Leung avoided losses of $2,863.

The next year Mr. Leung became aware of a transaction between Sangamo and another pharmaceutical firm. On the morning of May 10, 2017 he contacted his cousin, Joseph Zhang, and told him to purchase shares of the firm quickly. The cousin bought 16,900 shares hours before the firm announced the transaction. The next day the share price rose 60%. Mr. Zhang sold his shares, reaping $66,703 in profits. The Order alleges violations of Exchange Act Section 10(b).

To resolve the matter, Mr. Leung consented to the entry of a cease and desist order based on the section cited in the Order. He also agreed to pay disgorgement of $2,963 along with prejudgment interest. He will also pay a penalty of $69,566. See also In the Matter of Joseph Zhang, Adm. Proc. File No. 3-19888 (July 21, 2020)(action against cousin; resolved with entry of a cease and desist order based on Exchange Act Section 10(b), the payment of disgorgement in the amount of $66,703, prejudgment interest of $5,573 and the payment of a penalty equal to the amount of the disgorgement.

In each case the disgorgement is described as the illegal profits or losses avoided. The manner of calculation is not described. The word “net” used by the High Court is not used. In each case all of the money paid — disgorgement, prejudgment interest and penalties – was transferred to the U.S. Treasury “subject to” Exchange Act Section 21F(g)(3). That is the identical language used in earlier post–Liu cases. Whether this complies with Liu is not stated or disclosed.

Video Program: “The Many Faces of Securities Fraud – And How to Avoid the Subpoena,” August 6, 2020, 12:00 p.m. ET. Chair, Tom Gorman. Free registration, materials & CLE (here).

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