Securities and Exchange Commission v. Fishoff

Background

The Securities and Exchange Commission brought the action under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, which prohibit certain fraudulent securities trading. The SEC alleged that Steven Fishoff led a group of traders who used confidential information about Sangamo BioSciences Inc.’s planned licensing agreement with Biogen Idec Inc. The SEC alleged that Govender obtained the information from Winson Tang, a Sangamo executive and Govender’s longtime friend, and passed it to Fishoff for compensation.

According to the complaint, Fishoff and others made more than $1.5 million from trading based on the information. The complaint also alleged that Fishoff wired $222,788 to Govender for the tips and that Govender passed along additional confidential information for nearly a year.

Consent judgment and requested relief

The SEC and Govender reached a settlement. The court approved a partial consent judgment on June 4, 2019. That judgment barred Govender from future violations of Section 10(b) and allowed the court to later decide whether to order disgorgement, meaning repayment of unlawful gains, and a civil penalty. It also stated that Govender could not argue that he had violated no federal securities laws and that the court had to accept the complaint’s allegations as true when deciding the requested relief.

The SEC initially asked for $222,788 in disgorgement, $56,391.91 in prejudgment interest, and a $668,364 civil penalty. After the Supreme Court’s decision in Liu v. Securities and Exchange Commission, the SEC withdrew its request for disgorgement and interest and sought only the civil penalty.

Court’s analysis

Section 21A authorizes civil penalties for insider trading of up to three times the profit gained or loss avoided. The court explained that the penalty may be based on the total profit resulting from the violation, not only the defendant’s personal profit. Based on the complaint’s allegation that Fishoff and others made more than $1.5 million, the court stated that the maximum penalty the SEC could seek from Govender was $4.5 million. The SEC instead sought three times the $222,788 payment that Govender allegedly received.

Courts consider factors including the defendant’s responsibility, the amount of profit, whether the conduct was repeated, the penalty’s deterrent effect, the defendant’s financial condition, employment in the securities industry, any prior securities violations, and other penalties arising from the conduct.

Because of the consent judgment, the court rejected Govender’s attempt to dispute the complaint’s allegations. The court therefore accepted that Govender received $222,788 for providing material, nonpublic information that he knew, should have known, or was reckless in not knowing would be used for illegal trading. The court found that his conduct was central to the scheme, serious, and ongoing. Those circumstances supported a substantial penalty.

The court nevertheless found that Govender’s financial situation justified reducing the penalty. The court reviewed sealed financial statements describing substantial mortgage debt, a negative net worth of several hundred thousand dollars, difficulty finding employment, and a failed business effort. Although the SEC questioned some of his liabilities and argued that his age, education, and possible future earnings showed an ability to pay, the court credited Govender’s statements about his employment difficulties.

Disposition

The court entered judgment against Govender for $445,576, consisting entirely of civil penalties. The amount was twice the $222,788 in alleged ill-gotten gains, rather than the three-times amount requested by the SEC.