Securities Regulation Daily Petition challenges double civil penalty against cooperating whistleblower
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Wednesday, February 12, 2020

Petition challenges double civil penalty against cooperating whistleblower

By Rodney F. Tonkovic, J.D.

Was it wrong for a cooperating whistleblower in an insider trading case to be hit with a civil penalty of double the avoided losses?

A petition for certiorari asks the Supreme Court to address the "facts and circumstances" taken into account when determining a civil penalty. The petitioner blew the whistle on a $145 million biodiesel fraud, and claims that his cooperation with the government was key in obtaining verdicts against six other defendants. The petitioner was later sued by the SEC, and the petition asserts that the lower courts erred by not giving sufficient weight to his cooperation in assessing a double civil penalty. The petitioner argues that, based on his whistleblowing and cooperation, either no penalty should have been imposed or the penalty should be equal to his insider trading profits (Williky v. SEC, February 6, 2020).

Biodiesel fraud. In 2009, petitioner Gary S. Williky was hired to manage public relations and debt reduction for Imperial Petroleum, Inc. According to the SEC's 2013 complaint, the Indiana-based company was engaged in a fraudulent scheme to obtain government benefits meant for biodiesel producers while in fact selling finished fuel made by others. The Commission also brought an action against Williky alleging that he had worked to artificially inflate Imperial's stock through various types of market manipulation. Williky acquired millions of shares of Imperial stock, but after learning the full extent of Imperial's biodiesel fraud, sold off all of his shares by early 2012, thus avoiding a loss of almost $800,000, the Commission said. 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 sought, among other remedies, a civil penalty for Williky's 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).

The Seventh Circuit affirmed. Williky argued that the district court ignored his cooperation, but the panel said that the penalty's intent is not to encourage cooperation after the fact, but to deter insider trading. While cooperation is one factor that courts may assess, insider trading has its own provision calculating the penalty as a multiple of the losses avoided due to insider trading (Section 21A(a)(2)). 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. Moreover, the court said, Williky's cooperation was of limited value because Imperial was already under investigation by the SEC at the time it received his tip.

Double penalty an error? The petition asks whether the appellate court erred in determining that the trial court did not abuse its discretion by awarding civil penalties of twice the disgorgement amount against a cooperating whistleblower who provided information used to help obtain guilty pleas or verdicts against six other defendants. The petition documents numerous instances in which Williky contacted various federal agencies and asserts that his cooperation and information was used in the indictments and supported the verdicts against the Imperial defendants. The petition maintains that the district court abused its discretion by ignoring Williky's cooperation or by not giving that fact sufficient weight.

According to the petition, the trial court ignored the "great weight" of case law dealing with cooperating and settling defendants in which penalties are either not assessed or equal the gross amount of the gain. Cases imposing the maximum penalty, the petition observes, involve defendants who never admitted fault and never cooperated. And, while the Commission asserted that Williky's cooperation was of no help to it, the court should have taken into account his cooperation with other agencies, such as the FBI and EPA. So, the petition concludes, this case is a vehicle for resolving the method in which to determine relevant "facts and circumstances" that a trial court should take into account when determining a civil penalty.

The petition is No. 19-997.

Attorneys: Bryan C. Shartle (Sessions, Fishman, Nathan & Israel, LLC) for Gary S. Williky.

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