Securities Regulation Daily Civil penalty against recidivist market manipulator upheld
Tuesday, November 12, 2019

Civil penalty against recidivist market manipulator upheld

By Rodney F. Tonkovic, J.D.

Being a whistleblower did not help a consultant charged with insider trading in his attempt to reduce a civil penalty.

A district court adequately assessed a whistleblower's cooperation as being of limited value when it set a penalty for insider trading. The whistleblower argued that a civil penalty of twice the amount of losses avoided ignored his whistleblowing and cooperation with government investigations. A Seventh Circuit panel concluded that without extraordinary cooperation that was clearly not present in this case, the civil penalty was necessary as a deterrent against insider trading (SEC v. Williky, November 8, 2019, Bauer, W.).

Biodiesel fraud. This action arose out of a fraudulent scheme perpetrated by Imperial Petroleum, Inc., a company which falsely obtained government benefits for biodiesel producers while selling finished fuel made by others. Gary S. Williky was hired by Imperial as a consultant to artificially inflate its stock through market manipulation. In the 1990s, Williky had a long-standing relationship with Imperial's CEO and had engaged in similar market manipulation for another company in the 1990s. Williky acquired millions of shares of Imperial stock, but after learning the full extent of Imperial's fraud, Williky sold off all of his shares by early 2012, thus avoiding a loss of almost $800,000. After selling his shares, Williky contacted federal authorities, hoping to become a whistleblower, but the SEC and others had been investigating the company since at least late 2011.

The SEC then brought an action against Williky seeking, among other remedies, a civil penalty for his insider trading. Before he was deposed, Williky entered into a bifurcated settlement with the Commission in which he conceded his involvement in the fraud and agreed to let the court determine the financial remedies. The Commission requested a maximum civil penalty calculated at three times Williky's avoided losses. Over Williky's objection that the Commission ignored his cooperation with the various investigations into Imperial's fraud, the district court entered a judgment of $1,596,434 (two times the avoided losses).

Penalty affirmed. On appeal, Williky contended that the district court abused its discretion because it ignored his cooperation as a whistleblower and asked the panel to order a penalty equal to his avoided losses of $798,217. The court noted that in addition to the usual factors used in determining a general civil penalty for violations of the securities laws, insider trading has its own provision calculating the penalty as a multiple of the losses avoided due to insider trading (Section 21A(a)(2)); this is clearly meant as a deterrence against insider trading.

According to the court, Williky's focus on his whistleblowing missed the mark because the penalty's intent is not to encourage cooperation after the fact, but to deter insider trading. With no evidence of "extraordinary cooperation," the record showed that Williky was a recidivist offender who failed to admit any wrongdoing related to insider trading. Plus, the terms of the settlement stated that Williky would accept the complaint as true.

The panel also concluded that the district court properly weighed Williky's cooperation as being of limited value. The panel noted that Imperial was under investigation by the SEC before it received Williky's tip and that he was not an essential part of the criminal investigation since he did not testify in the CEO's trial. Finally, Williky maintained that his settlement itself was evidence of his cooperation, but the panel noted that he had been "notable uncooperative" over the course of the litigation. Allowing Williky to commit insider trading and then settle to avoid penalties would undermine the purpose of the statute, the panel said in conclusion.

The case is No. 19-1243.

Attorneys: Michael Andrew Conley for the SEC. David R. Clouston (Sessions, Fishman, Nathan & Israel, LLC) for Gary S. Williky.

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