Securities and Exchange Commission v. Yin

Background

The Securities and Exchange Commission brought this insider-trading case against Shaohua Yin, whom it alleges traded securities in DreamWorks Animation SKG, Inc. and Lattice Semiconductor Corporation using inside information. The SEC alleges that some trades were made through five brokerage accounts nominally held by Relief Defendants, most of whom were related to or friends with Yin. The opinion states that the Relief Defendants were not alleged to have engaged in wrongdoing.

The parties stipulated to a freeze of the assets in the accounts. Approximately $81 million remained frozen. The case had proceeded to discovery after the court denied the defendants’ motion to dismiss and rejected the Relief Defendants’ request for reconsideration.

Default Judgment Against Yin

The SEC sought a default judgment against Yin as a discovery sanction under Federal Rule of Civil Procedure 37(b)(2)(A). The SEC argued that Yin violated the court’s order requiring him to appear for a deposition in Taiwan. The court had warned Yin that failing to comply could result in a default judgment.

The court found that Yin willfully failed to appear on October 16, 2019. It rejected his explanation that appearing in Taiwan could expose him to arrest or detention because the Department of Justice had not granted him safe passage. The court concluded that this concern did not excuse disobedience of the court’s order and that lesser sanctions were unlikely to secure his compliance.

Yin also argued that the SEC’s complaint did not adequately plead insider trading. The court rejected that argument because it had already ruled that the complaint sufficiently stated an insider-trading claim. The court held that Yin’s willful disregard of the deposition order entitled the SEC to a default judgment and that the complaint supported that judgment.

Computer Evidence and Special Master

The SEC asked the court to appoint a special master—a neutral person appointed to assist with matters the court cannot effectively handle itself—to oversee discovery concerning Yin’s computers. The court considered evidence that more than 91,000 files had been deleted from Yin’s work computer after the SEC served the lawsuit and an order prohibiting destruction of relevant documents. Yin later said the files had been transferred to a personal computer that became inoperable. The SEC questioned whether the files had been reliably retrieved and whether all potentially responsive files had been searched.

The court found that Yin’s delayed disclosure, the failure to preserve or disclose the transferred material earlier, the unknown circumstances surrounding the personal computer’s failure, and the possible unreliability of the file retrieval justified court intervention. The court granted the SEC’s motion to appoint a special master. The parties were ordered to propose a neutral forensic expert within 14 days, or the court would appoint one. The expert was ordered to examine the personal computer’s hard drive, identify responsive documents, and report on the claimed transfer, preservation, alteration, or deletion of the files and the cause of the computer’s failure.

Sanctions Against the Relief Defendants

The SEC sought discovery sanctions against the Relief Defendants, including an adverse inference—a direction allowing a court to treat missing evidence as unfavorable to the party responsible for losing it—against Zhiqing Yin, Lizhao Su, Jun Qin, and Yan Zhou. The SEC also sought new electronic searches using a neutral professional interpreter or translator.

The court noted that Qin had disposed of an unsearched cellphone, Zhiqing Yin could not recall when he discarded his unsearched phone, and Zhou had deleted messages and other electronically stored information from an old phone before searching it. The court also noted that Su and Bei Xie said they later located and searched phones that the SEC claimed had been lost or replaced.

The court declined to impose the requested adverse inference. It could not determine that the Relief Defendants acted with the intent required for that sanction because discovery had largely been directed by Yin and because problems with their discovery may have resulted from the arrangement with their shared lawyers rather than from bad intent by the Relief Defendants. The court was especially concerned that the Relief Defendants communicated with counsel through Yin, who was himself a party with an interest in the case and may have had conflicts with them.

The court nevertheless ordered the Relief Defendants to submit a protocol for new searches of their preserved devices and email accounts without Yin’s involvement. Counsel had to use professional translators, interpreters, and third-party vendors when necessary and could not rely on Yin as an intermediary for substantive communications. The court also ordered counsel for Yin, Su, Zhiqing Yin, Xie, and Qin to explain why their clients’ interests did not conflict or how any conflict had been effectively waived. The discovery-sanctions motion was granted in part and denied in part.

Asset Freeze

Certain Relief Defendants sought to modify the asset freeze to the extent the frozen assets exceeded approximately $35.8 million, which they described as the SEC’s maximum potential recovery from them. The SEC responded that the funds were actually Yin’s or were mixed with his money and therefore could be used to satisfy civil penalties connected to his liability.

The court denied the motion to modify the freeze. It held that the SEC had shown a likelihood of success in proving that the Relief Defendants were nominee account holders for Yin. The court relied on Yin’s statements to the Federal Bureau of Investigation that he opened and used accounts in the names of certain Relief Defendants with his own money, Qin’s testimony that Yin directed him to open an account and controlled its trading, the Relief Defendants’ limited knowledge of large transfers, and Yin’s control over trading in all of the accounts.

The court found that the Relief Defendants’ tracing analysis did not establish actual ownership of the funds because it traced transfers between accounts but did not determine who owned the money in the accounts where the tracing stopped. The court concluded that the evidence was sufficient to maintain the entire asset freeze at that stage. It also stated that later legal developments could limit disgorgement from innocent parties’ profits, but found that issue did not change the ruling because the Relief Defendants had not raised it and had not shown that the freeze should be modified.

Disposition

The court granted the SEC’s motion for default judgment against Shaohua Yin and granted its motion to appoint a special master. It granted in part and denied in part the SEC’s motion for discovery sanctions against the Relief Defendants. It denied the Relief Defendants’ motion to modify the asset freeze, denied their motions to strike certain filings, and denied as moot their letter motion for a conference. The court directed the parties to submit the required proposals and letter within 14 days and closed the listed motions.