The opinion of the court was delivered by: John F. Keenan, United States District Judge
This is the final judgment in a civil securities fraud case. Following a November 11, 2005 jury verdict finding the Defendant Paul Johnson ("Johnson") liable on four counts of securities fraud, the Securities and Exchange Commission ("SEC") has moved for a permanent injunction, $2,405,230 of disgorgement with prejudgment interest, and $2,405,230 in civil penalties. On March 24, 2005, the Court denied the Defendant's motion for summary judgment. S.E.C. v. Johnson, No. 03 Civ 177, 2005 WL 696891 (S.D.N.Y. Mar. 24, 2005). On January 31, 2006, the Court denied Defendant's motion to set aside the verdict or, in the alternative, for a new trial. SEC v. Johnson, No. 03 Civ. 177, 2006 WL 238998 (S.D.N.Y. Jan. 31, 2006)
Johnson argues that the Court should not impose an injunction, order disgorgement, or impose civil penalties. However, in the event the Court deems disgorgement appropriate, Johnson claims the amount proposed by the SEC should be significantly limited. If the Court decides to order civil penalties, Johnson argues the penalties should be limited to $25,000.
The Court finds the SEC's proposals to be too severe and Johnson's proposals too mild. Giving adequate deference to the jury's verdict and taking into account other factors discussed below that warrant some leniency for Johnson, the Court orders the more appropriate remedy of a five-year injunction, $1,868,796 of disgorgement and prejudgment interest thereon, and $125,000 in civil penalties.
Following the Court's Opinion, set forth below, the Court has annexed its Final Judgment.
The SEC had charged Johnson, a former research analyst with the firm of Robertson Stephens, with issuing false and misleading research reports and public statements about three companies: Corvis, Redback, and Sycamore. According to the SEC, Johnson's actions with regard to these companies violated the Exchange Act of § 10(b), 15 U.S.C. § 78j(b) ("§ 10(b)"), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 ("10b-5"), and with regard just to Corvis also violated the Securities Act § 17(a), 15 U.S.C. § 77q(a) ("§ 17(a)").
Beginning in November 1999, Bayview, an employee investment fund at Robertson Stephens, invested approximately $5 million in Corvis stock, of which approximately $90,000 represented Johnson's personal investment. Bayview signed lockup agreements in June 2000, prohibiting Bayview from selling the Corvis shares until 180 days after Corvis's anticipated initial public offering ("IPO"). Corvis went public on July 27, 2000.
In August 2000, Johnson reported on Corvis, calling it a "buy." Johnson reiterated this view in an October 2000 research report. Neither report disclosed that Johnson had a personal interest in Corvis. These first two research reports are mentioned in the complaint as background, but are not specifically charged as violations of the securities laws. (Compl. ¶¶ 28, 34.)
According to the complaint, Johnson first acted with scienter when he told investors in a January 16, 2001 research report that Corvis was a "buy," while privately recommending to members of his firm at a January 23, 2001 Bayview meeting that they sell their holdings when the lock-up period expired the next day, January 24, 2001. (Compl. ¶¶ 29, 30, 34.) Though her memory of the meeting was not crystal clear, a witness testified that Johnson may have stated at the meeting that he would not buy at Corvis's current price but would be a buyer at twelve to fourteen dollars -- about half of the market price at the time.
On January 24, 2001, Johnson sold all of his Corvis shares, realizing a profit of $127,987. Johnson publicly disclosed his sale by filing a Form 144 statement with the SEC. In a January 26, 2001 research report, Johnson again rated Corvis a "buy," and did not disclose his own sale of Corvis shares or his seemingly contradictory statements at the Bayview meeting. At trial, Johnson claimed he sold his Corvis shares because he needed cash liquidity.
In March 1999, Johnson purchased $50,000 worth of shares from Siara, a private company. In June 1999, Johnson issued a research report, in which he rated the public company, Redback, a "buy."
On November 29, 1999, Redback announced its intent to acquire Siara in a stock transition. On the same day, Johnson issued a research report, rating Redback a "strong buy" and speaking favorably of Redback's upcoming merger with Siara.
The next day, on November 30, 1999, Johnson issued another research report on Redback, continuing to speak favorably of the Redback-Siara merger. Robertson Stephens issued a press release, which Johnson approved, publicizing Johnson's support of the merger. The reports and press release failed to disclose that Johnson owned Siara stock.
When the merger finally closed in March 2000, Johnson's Siara stock was converted to Redback stock with a value of nearly $10 million. In December 2000, at the demand of Robertson Stephens, Johnson deposited his Redback shares into a trust account.
In November 1999, Johnson issued a research report, rating Sycamore a "buy." About 3 months later, in February 2000, Johnson invested $75,000 in the private company, Sirocco. On June 6, 2000, Sycamore announced it would acquire Sirocco. Also on June 6, Johnson issued a research report on Sycamore praising the merger, and he made an appearance on CNNfn's Market Coverage television show, in which he recommended the stock to viewers. Neither the reports nor the appearance disclosed Johnson's ownership of Siara stock.
The merger closed on September 7, 2000, making Johnson's converted Sycamore shares worth approximately $2.2 million. Johnson realized $555,567 of this paper profit by selling 10,000 of his Sycamore shares on December 5, 2000. Johnson claimed at trial that he needed the money to cover a $600,000 check he had written for the down payment on his Manhattan apartment.
The jury was charged as to § 10(b), and Rule 10b-5.*fn1
To establish a cause of action under § 10(b) or 10b-5, a plaintiff must show "(1) in connection with the purchase or sale of a security; (2) defendant, acting with scienter; (3) made a material misrepresentation or (where there exists a duty to speak) a material omission." Press v. Quick & Reilly, Inc., 218 F.3d 121, 129 (2d Cir. 2000).
The jury found by a fair preponderance of the evidence that Johnson made omissions and misrepresentations that were material in the eyes of a reasonable investor and that Johnson acted with scienter when he failed to adequately disclose his interest in companies he covered in research reports. The jury answered affirmatively the four special interrogatories posed by the Court:
1. Has the S.E.C. established by a fair preponderance of the evidence that Paul Johnson violated the federal securities laws in accordance with my charge by fraudulently omitting material facts as to Redback?
2. Has the S.E.C. established by a fair preponderance of the evidence that Paul Johnson violated the federal securities laws in accordance with my charge by fraudulently omitting material facts as to Sycamore?
3. Has the S.E.C. established by a fair preponderance of the evidence that Paul Johnson violated the federal securities laws in accordance with my charge by fraudulently omitting material facts as to his sale of Corvis stock?
4. Has the S.E.C. established by a fair preponderance of the evidence that Paul Johnson violated the federal securities laws in accordance with my charge by fraudulently misstating material facts as to ...