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Fr. Emmanuel Lemelson: Motion For Attorney's Fees and Costs
Fr. Emmanuel Lemelson: Motion For Attorney's Fees and Costs
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SECURITIES AND EXCHANGE COMMISSION, )
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Plaintiff )
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v. )
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REV. FR. EMMANUEL )
LEMELSON ) Civil Action No. 1:18-cv-11926-PBS
and LEMELSON CAPITAL MANAGEMENT, LLC, )
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Defendants, )
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and )
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THE AMVONA FUND, LP, )
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Relief Defendant )
(d)(1)(D), and Fed. R. Civ. P. 54(d), Defendants Father Emmanuel Lemelson (f/k/a Gregory
submit this memorandum in support of their motion for fees and costs.
Two independent bases exist under the EAJA entitling Fr. Lemelson to recover from the
government the fees and costs he incurred in this litigation. First, Fr. Lemelson was the
“prevailing party” in this litigation, as courts have defined that term under the EAJA, and the
Commission’s position as to the claims on which it lost were not substantially justified. Second,
the Commission’s demands for sanctions since the outset of the litigation were excessive when
Indeed, this case is a quintessential example of why Congress enacted the EAJA:
Concerned that the Government, with its vast resources, could force citizens into
acquiescing to adverse Government action, rather than vindicating their rights,
simply by threatening them with costly litigation, Congress enacted the EAJA,
waiving the United States’ sovereign and general statutory immunity to fee
awards and creating a limited exception to the “American Rule” against awarding
attorneys fees to prevailing parties.1
Here, the Commission brought a sprawling Complaint against Fr. Lemelson, and left no
doubt that it centered on a scheme to defraud not only the arms-length investing public but even
Fr. Lemelson’s own investors. The Commission issued a press release simultaneous with the
Complaint, titled, “SEC Charges Hedge Fund Adviser With Short and Distort Scheme.”
(emphasis added). Ultimately, the jury rejected the Commission’s core scheme charge along
with three other claims the Commission levied against Fr. Lemelson. As a former Senior Trial
Counsel and member of the executive staff of the SEC’s Division of Enforcement recently
1
Pierce v. Underwood, 487 U.S. 552, 575 (1988) (Brennan, J., concurring in part and concurring in the judgment).
1
observed: “Not only was the jury unconvinced by the SEC’s showing with regard to
misstatements, the jury outright rejected the SEC’s fraudulent scheme charge; the jury also found
the SEC failed to prove a negligent, reckless, or intentional violation of the Investment Advisors
Act by Lemelson or LCM. . . .The Commission brought the widest array of potential claims
against Lemelson and his company, and his decision to fight he charges paid off.” Similarly,
Further, at the outset of this case, the Commission demanded what effectively amounted
Lemelson. In its final judgment, the Court awarded the Commission no disgorgement and a
limited injunction of just five years. Notably, the Commission tacitly acknowledged that its
sanction demands were excessive when it failed to cross-appeal the Court’s final judgment.
As set forth below, under the circumstances present here, the EAJA requires the
government to pay the fees and costs incurred by Fr. Lemelson to defend himself against the
government’s unproven claims and wildly excessive sanction demands. Accordingly, Fr.
Lemelson respectfully requests that the Court grant the instant Motion and award fees and
In 2014, Fr. Lemelson took a short position in a public company called Ligand
Pharmaceuticals and, exercising his constitutional rights to free speech and press, published five
research reports and conducted multiple radio interviews concerning Ligand and his short
2
Attached to the accompanying affidavit of Douglas S. Brooks are the firm’s invoices up to and including the date
of the Court’s Judgment. Counsel has excluded and redacted the fees and costs for any work not directly related to
defense of this case.
3
Where not otherwise cited, the facts are taken from the trial record.
2
position. In response, Ligand repeatedly lobbied the Commission to bring an enforcement action
against Fr. Lemelson stemming from his commentary about the company.
Commission with a so-called “Wells” submission, explaining in detail the factual and legal
deficiencies of the Commission’s threatened case. See Affidavit of Douglas S. Brooks (DSB
Aff.) ¶ 16. Ignoring Fr. Lemelson’s explanation, the Commission pressed forward undaunted.
On September 12, 2018, more than four years after Fr. Lemelson’s first published report about
Ligand, the Commission filed a Complaint against him alleging (i) most seriously, that Fr.
Lemelson engaged in a systematic scheme to defraud by driving down the price of Ligand’s
stock; (ii) that Fr. Lemelson made a false statement concerning Ligand’s insolvency; (iii) that Fr.
Lemelson made a false statement, not contained in any of his written reports, attributed to
Ligand’s investor relations firm; (iv) that Fr. Lemelson made two false or misleading statements
concerning another company that he never traded in; and (v) two claims under the Advisers’ Act
based on a theory that Fr. Lemelson defrauded his own investors (including one claim charging a
After Fr. Lemelson demonstrated that his statement concerning Ligand’s insolvency was
demonstrably true—and the Commission’s position to the contrary was based on an unverified
and patently false allegation—the Court dismissed that claim. ECF No. 29. Not to be dissuaded
by the facts, the Commission amended its complaint and alleged that Fr. Lemelson made five
statements about Ligand’s insolvency that while true, were nonetheless misleading. ECF No. 33.
After four years of extensive and costly discovery and motion practice, trial began on
October 26, 2021. Following a seven-day jury trial, the jury reached a verdict that revealed the
4
The Commission packaged the first four of these claims into a single “Claim for Relief” under Section 10(b) of the
Exchange Act in its Complaint. ECF No. 1 at 17.
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Commission’s monumental overreach. ECF No. 232. Specifically, the jury rejected the
Commission’s core scheme to defraud charge; it rejected the Commission’s claim concerning Fr.
Lemelson’s multiple statements about Ligand’s insolvency; and it rejected the Commission’s
two claims that Fr. Lemelson defrauded his own investors. Id. The jury did find Fr. Lemelson
Under any objective analysis, the verdict represented a substantial loss for the
Commission. As a former member of the executive staff of the SEC’s Division of Enforcement
observed: “Not only was the jury unconvinced by the SEC’s showing with regard to
misstatements, the jury outright rejected the SEC’s fraudulent scheme charge; the jury also found
the SEC failed to prove a negligent, reckless, or intentional violation of the Investment Advisers
Act by either Lemelson or LCM.” DSB Aff. ¶ 12; Ex. 6. Any argument that the Commission’s
case was not centrally focused on its failed scheme claim is laid bare by the Commission’s false
press release, issued minutes after the verdict, in which it fraudulently claimed victory on that
count. DSB Aff. ¶ 14; Ex. 8. Ultimately, having been called out for its misconduct, the
Commission took down this false press release from its website. Id. Nonetheless, hours later,
the Commission sent the same fraudulent press release out to its entire email distribution list,
Despite losing on its core claim, as well as its two Advisers Act claims and its claim
concerning statements about Ligand’s insolvency, after trial, the Commission remained hellbent
on financially ruining Fr. Lemelson. It outrageously sought the most severe penalties available
disgorgement), and an order permanently enjoining Fr. Lemelson from future violations of
Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. See ECF No. 245 at 1.
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The Court recognized the Commission’s overreach and imposed a civil monetary penalty of just
$160,000, limited the Commission’s request for permanent injunctive relief to a period of five
years, and, in a clear and unambiguous rejection of the Commission’s scheme liability claim
(which of course had already been shot down by the jury) the Court ordered no disgorgement.
ECF No. 274. From where it started at the beginning of this lawsuit, the judgment can only be
The substantial victory Fr. Lemelson achieved, however, came at a heavy price. As with
any defendant whom the Commission targets for an enforcement action, Fr. Lemelson suffered
great and irreparable reputational damage. Additionally, Fr. Lemelson incurred significant
attorneys’ fees and costs associated with defending himself. All for the Commission to recover
less than 7% of the monetary penalties it demanded, none of which included the large
disgorgement amount it sought from the beginning of this case. Under these circumstances, the
EAJA compels the federal government to pay attorneys’ fees and costs.
ARGUMENT
“The Act requires that a party seeking an award of fees under this section submit an
application establishing: (1) that it is a prevailing party; (2) that it is ‘eligible to receive an
award’; and (3) the amount sought, ‘including an itemized statement from any attorney
representing ... the party.” New Hampshire Hosp. Ass'n v. Azar, No. 15-CV-460-LM, 2019 WL
1406631, at *4 (D.N.H. Mar. 28, 2019) (citing Scarborough v. Principi, 541 U.S. 401 (2004))
(alterations in original).5
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The EAJA provides that “a party seeking an award of fees and other expenses shall, within thirty days of final
judgment in the action, submit to the court an application for fees and other expenses which shows that the party is a
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“Congress enacted the Equal Access to Justice Act to encourage parties to challenge or
defend against unreasonable governmental action.” Schock v. F.D.I.C., 118 F. Supp. 2d 165, 168
(D.R.I. 2000), aff'd sub nom. Schock v. United States, 254 F.3d 1 (1st Cir. 2001). The EAJA
explicitly provides that “a court shall award to a prevailing party ... fees and other expenses ...
unless the court finds that the position of the United States was substantially justified or that
special circumstances make an award unjust.” 28 U.S.C.§ 2412(d)(l)(A) (emphasis added); see
also Castaneda-Castillo v. Holder, 723 F.3d 48, 68 (1st Cir. 2013) (“The Supreme Court has
noted that the word ‘shall’ ordinarily connotes an intention by Congress ‘to impose discretionless
obligations.”); Trinidad v. Secretary of HHS, 935 F.2d 13, 15 (1st Cir. 1991) (holding abuse of
discretion in denying a fee application when the government has not contested prevailing status,
established its position was substantially justified, nor objected to the fee request).6
B. Both Fr. Lemelson and LCM are Eligible Parties Under the EAJA
An eligible party under the EAJA is defined as “(i) an individual whose net worth did not
exceed $2,000,000 at the time the civil action was filed, or (ii) any owner of an unincorporated
the net worth of which did not exceed $7,000,000 at the time the civil action was filed, and
which had not more than 500 employees at the time the civil action was filed.” See 28 U.S.C. §
prevailing party and is eligible to receive an award under this subsection.” 28 U.S.C. § 2412(d)(1)(B). “Final
judgment” is defined under the statute as “a judgment that is final and not appealable.” 28 U.S.C. § 2412(d)(2)(G).
Fr. Lemelson appealed to the United States Supreme Court, and his petition for writ of certiorari was denied on
December 11, 2023. See Lemelson v. SEC, No. 23-98, 2023 WL 8531892, at *1 (U.S. Dec. 11, 2023). Thus, this
application for fees is timely. Castaneda-Castillo v. Holder, 723 F.3d 48, 66 (1st Cir. 2013) (holding “final
judgment” under the EAJA occurs after deadline for filing petition for certiorari to the Supreme Court).
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The amount a defendant has or has not paid is not a relevant consideration. The recoverable amount under the
EAJA is what the defendant has incurred, not the amount expended. “The client should be reimbursed for what he
or she has already paid, and the attorney should be compensated for any additional, unpaid labor or costs.” Pablo
Lorenzo v. Barr, 806 F. App'x 431, 436 (6th Cir. 2020) (rejecting argument that only what client paid can be
recovered as attorney’s fees and entitling attorney to unpaid fees).
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2412(d)(2)(B)). Here, Fr. Lemelson’s affidavit establishes both his and LCM’s eligibility. See
C. Prevailing Party
“The standard to establish that one is a prevailing party is not burdensome.” S.E.C. v.
Berlacher, No. CIV.A. 07-3800, 2012 WL 512201, at *2 (E.D. Pa. Feb. 15, 2012) (concluding a
defendant who received a mixed verdict in a case brought by the Commission was the
“prevailing party” under the EAJA). “The key is a ‘judicially sanctioned change in the legal
relationship of the parties.’” Id. (citing Buckhannon Bd. & Care Home, Inc. v. W. Va. Dep't of
Health & Human Res., 532 U.S. 598, 605 (2001). In Berlacher, after a bench trial, the court
concluded that the defendant “had engaged in two instances of securities fraud, but that there was
insufficient evidence to find him liable on two other counts of fraud and one count of insider
trading.” Id. at *1. The court concluded that because ‘the Applicants were the beneficiaries of
such a change with respect to” a portion of the SEC’s claims in the litigation, “the Applicants
prevailed on those issues within the meaning of the EAJA.” Id. at *2 n.4.
Under this framework, there can be no dispute that Fr. Lemelson satisfies the prevailing
party standard of the EAJA. The Commission’s case centered on its allegation that Fr. Lemelson
engaged in a scheme to defraud by driving down the price of Ligand’s stock. Notably,
simultaneous with the filing of its Complaint, the Commission issued a press release, titled “SEC
Charges Hedge Fund Adviser With Short-and-Distort Scheme.”7 The first paragraph of the
release read: “The Securities and Exchange Commission today charged a hedge fund adviser and
his investment advisory firm with illegally profiting from a scheme to drive down the price of
7
See Press Release, SEC Charges Hedge Fund Adviser With Short-and-Distort Scheme, SECURITIES &
EXCHANGE COMMISSION, (Sept. 12, 2018), https://www.sec.gov/news/press-release/2018-190. See DSB
Aff. ¶ 15; Ex. 9.
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San Diego-based Ligand Pharmaceuticals Inc., reaping more than $1.3 million of gains for the
adviser and the hedge fund.” Id. (emphasis added). The jury flatly rejected all these allegations.
The same press release also focuses on the insolvency statements that the jury rejected, and
importantly makes no mention of the two statements for which Fr. Lemelson was found liable
Notably, the Commission was apparently so disconsolate that it lost its highly touted
scheme to defraud claim, that despite the jury’s verdict, the Commission falsely claimed victory
in a widely discredited and since-taken-down press release it issued on the day of the verdict.
See DSB Aff. ¶ 14; Ex. 8. After it took down the false release, however, it syndicated the false
statements again in an email to its entire distribution list. Lemelson Aff. ¶ 7. The media that
followed the trial called out the Commission’s false claims. “The SEC’s comments on the
verdict might confuse the historical record. Its press release headline reads: ‘SEC Wins Jury
Trial Against Hedge Fund Adviser Who Ran Manipulative Short Scheme.’ But the jury’s very
first vote was a finding that the agency didn’t prove its allegations of a ‘scheme.’” DSB Aff. ¶
9; Ex. 3.
The jury also rejected the Commission’s two incendiary claims arising under the
Advisers Act that Fr. Lemelson defrauded his own investors and its claims that he made a series
of misleading statements about Ligand’s insolvency. The jury found liability on only two stray
statements about another company and a 1.5 second oral comment not contained in any of Fr.
Lemelson’s reports attributed to Ligand’s investor relations firm. Not surprisingly, objective
global media outlets have declared Fr. Lemelson the victor. See, e.g., DSB Aff. ¶ 10; Ex. 4
(Law 360 article recognizing that Fr. Lemelson “largely beat a U.S. Securities & Exchange
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D. Substantial Justification
Once a party establishes that it is eligible and a “prevailing party” under the EAJA, the
burden shifts to the government to prove “that its position was substantially justified by a
preponderance of the evidence.” United States v. Yoffe, 775 F.2d 447 (1st Cir. 1985); see also
Scarborough, 541 U.S. at 403 (“the allegation functions to shift the burden to the Government to
prove that its position in the underlying litigation ‘was substantially justified’”).
“The government's position will be substantially justified where it had a reasonable basis
both in law and in fact.” Berishev v. Chertoff, 486 F. Supp. 2d 202, 206 (D. Mass. 2007) (citing
Pierce, 487 U.S. at 563) (internal quotations omitted). “The test for whether the government
meets this standard is essentially one of reasonableness.” Id. (internal quotations omitted). “The
test breaks down into three parts: did the government have a reasonable basis for the facts
alleged; did it have a reasonable basis in law for the theories advanced; and did the facts support
Further, the government “is not exempted from liability under the EAJA merely because
it prevailed at some interim point in the judicial process.” Sierra Club v. Sec'y of Army, 820 F.2d
513, 517 (1st Cir. 1987). “The most powerful indicator of the reasonableness of an ultimately
rejected position is a decision on the merits and the rationale which supports that decision.”
S.E.C. v. Zahareas, 374 F.3d 624, 626–27 (8th Cir. 2004). “The government must show ‘that it
acted reasonably at all stages of the litigation.’” Id. (emphasis added). Therefore, the
government must “abandon its opposition to the other party as soon as it becomes apparent that
its litigation position is not substantially justified.” Envtl. Defense Fund, Inc. v. Watt, 722 F.2d
1081, 1086 (2d Cir.1983). The Commission cannot meet that burden here.
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1. The Commission’s Scheme Liability Theory Lacked Substantial
Justification Because It Lacked All the Necessary Evidence and was
Legally Unsound
The Commission had never before brought a short-and-distort scheme to defraud case
remotely resembling this one. And for good reason. At all times throughout this litigation, it
should have been crystal clear to the Commission that its case lacked all the hallmarks of a true
short-and-distort scheme because there was no evidence supporting such a scheme. Indeed, the
Court itself recognized the lack of justification supporting the failed scheme claim when, during
jury deliberations, it remarked: “This is why I’ve always said this [scheme claim] was an
underdeveloped piece of your case other than misstatements….” ECF No. 257 at 9-10. It is
therefore not surprising that the jury rejected the Commission’s core theory of liability.
Once again, neutral observers have weighed in on this issue and questioned the
Commission’s logic in pursuing this case centered around an alleged scheme to defraud. “Many
companies sue critics, but it’s unusual for the SEC to go after a money manager who publicly
At least four separate and independent bases exist that clearly demonstrate the
First, Fr. Lemelson disclosed his short position in all five of his reports totaling 56 pages
and in multiple radio interviews. “Short sellers operate by speculating that the price of a security
will decrease. They can perform a useful function by bringing information that securities are
overvalued to the market. However, they have an obvious motive to exaggerate the infirmities of
the securities in which they speculate.” In re Longtop Fin. Techs. Ltd. Sec. Litig., 910 F. Supp.
2d 561, 577 (S.D.N.Y. 2012) (granting motion to dismiss Rule 10b-5 claims). Applying this
logic, courts have found that identifying a short position or other conflict of interest, and fulsome
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disclosures generally, militate against liability for alleged securities violations. See, e.g.,
Aurelius v. Bofl Fed. Bank, No. MC 16–71 DSF (FFM), 2016 WL 8925145, at *3 (C.D. Cal.
Sept. 20, 2016) (granting motion to quash subpoena and reasoning that defendant “stated in each
of his articles that he was ‘short’ Bofl stock. It would seem unlikely for [defendant] to make such
Therapeutix, Inc., 955 F.3d 194, 208 (1st Cir. 2020) (reasoning that disclosure of FDA Form 483
in same filing that stated company was using good manufacturing practices “undercut any
inference that defendants intentionally or recklessly misled investors”). At minimum, as the jury
Second, Fr. Lemelson published his reports in his own name, something a short seller
engaging in a scheme to defraud would never do and something unique to this failed scheme
case. Compare Doe v. SEC, No. C 11-80209, 2011 WL 5600513, at *1 (N.D. Cal. Nov. 17,
2011) (denying motion to quash SEC’s subpoena to Google seeking the identity of anonymous
email account suspected to be involved in pump-and-dump scheme); SEC v. Curshen, 372 Fed.
App’x 872, No. 09-1196, 2010 WL 1444910, at *7-10 (10th Cir. Apr. 13, 2010) (affirming
liability and injunction against individual that shared false information about company by
anonymous postings). As Columbia Law professor Joshua Mitts, who has studied activist short
sellers, and has worked as a consultant to both the Commission and the Department of Justice,
observed to Barron’s: “This sort of case is very infrequent.” DSB Aff. ¶ 8; Ex. 2 (“In four
[short-and-distort] cases filed by the SEC in the last two decades, the agency charged traders
with spreading negative rumors while hiding their identities and then quickly exiting their short
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Third, the Commission typically establishes scienter in a short-and-distort scheme case
by showing that after making a false statement aimed at driving down the stock, the offender
covered his short position almost immediately before the market had a chance to discover the
truth. See, e.g., Complaint, SEC v. Berliner, No. 1:08-cv-03859-JES (S.D.N.Y. Apr. 24, 2008)
(Commission alleged defendant acted intentionally because he sold short 10,000 shares of stock
“within minutes” of disseminating false information). In stark contrast here, Fr. Lemelson held
on to a substantial portion of his position in Ligand until October 2014—almost four months
after he published his initial report and almost two months after his final one. See Reliance Ins.
Co. v. Barron’s, 442 F. Supp. 1341, 1353 (S.D.N.Y. 1977) (granting summary judgment in part
because defendants did not purchase or sell any of the subject securities at or about the time of
the offending article). By holding on to his short position in Ligand long after his reports and
interviews, Fr. Lemelson acted in a manner entirely inconsistent with a scheme to defraud.
Fourth, far from any scheme to defraud, Fr. Lemelson truly believed that Ligand was
overvalued—and the Commission never adduced evidence to the contrary. Prior to trial,
evidence was available that Fr. Lemelson was operating in good faith. For example, Fr.
Lemelson worked with an editor on all the Ligand reports. The Commission deposed the editor
who testified unequivocally that Fr. Lemelson staunchly believed in all his opinions. See ECF
No. 126 ¶ 138. (“I never sensed in any way there was any conscious effort to misrepresent
anything”); (“I will say that Father Emmanuel felt very adamant about [Ligand], that it was not
just overvalued but may have actually no material value”); (“He passionately believed these – in
each one of these stocks, whether it was long or short, that he was adamantly correct. . . . But I
had no firsthand, at least, observation of anything that even brushed up against a violation of any
securities laws, at least as I understand securities laws”). Moreover, Fr. Lemelson’s theory about
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Ligand proved accurate. Despite the Commission promoting Ligand’s stock price as “recently
trading above $250 per share” in its Complaint, Ligand’s stock price has fallen as much as 88
percent since that time, destroying billions of dollars in shareholder value. Lemelson Aff. ¶ 6. It
has never substantially recovered, despite the significant increase in the S&P 500 index and the
NYSE Biotech Index, the indexes Ligand itself used to benchmark its performance. Id.
Investors who listened to Fr. Lemelson, instead of the Commission’s misguided promotional
language about Ligand’s stock price, would have been spared substantial losses.
Despite all this evidence showing that Fr. Lemelson did not engage in a scheme to
defraud, the Commission nonetheless pressed its scheme claim for years and forced Fr.
Lemelson to incur substantial fees and costs to successfully defend himself. Accordingly,
because the Commission’s litigation position that Fr. Lemelson engaged in a scheme to defraud
was never substantially justified, the EAJA commands that it pays the fees and costs.
The Commission’s allegation that Fr. Lemelson’s statements about Ligand’s insolvency
violated the securities laws—which constituted the second major prong of its press release
announcing the charges—never had a reasonable basis in law or fact. The Commission initially
alleged that Fr. Lemelson’s calculation of Ligand’s debt-to-tangible-equity ratio was knowingly
false because he did not include the cash proceeds from a bond offering as equity. ECF No. 1 ¶
52. In fact, it was the Commission’s contention that was false, because proceeds from debt do
not constitute equity, as the Commission subsequently acknowledged. The Court correctly
dismissed the Commission’s claim in its original complaint, stating “the SEC has failed to plead
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with particularity how a statement about Ligand’s debt-to-tangible-equity ratio is materially false
Rather than acknowledge its error and move on, the Commission insisted on pressing its
groundless claim based on Fr. Lemelson’s correct analysis that Ligand was insolvent. In its
Amended Complaint, the Commission changed its theory and alleged that a series of true
statements Fr. Lemelson made concerning Ligand’s insolvency “were misleading because
intellectual property and goodwill – in claiming that Ligand was insolvent.” ECF No. 33 at 15.
In exhuming this baseless claim, the Commission simply ignored that Fr. Lemelson
expressly disclosed in the very title of the calculation that he was only considering Ligand’s
tangible assets, and thus reasonable investors (whether they agreed with him or not) understood
the components of his financial analysis and were free to either accept or disregard it. ECF No.
12-4 at 2. Accordingly, not only were Fr. Lemelson’s statements concerning Ligand’s
insolvency true, but his fully transparent disclosures cloaked the statements with First
Amendment protection. See, e.g., Phantom Touring, Inc. v. Affiliated Publications, 953 F.2d
724, 731 (1st Cir. 1992) (“A number of courts, including Massachusetts, have immunized
surprising that the jury rejected this claim as to all five statements at issue, as that claim was
litigation more than its claims under Section 206 of the Investment Advisers Act (“IAA”), in
which the Commission debuted a novel and nonsensical theory that Fr. Lemelson defrauded his
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own investors by failing to disclose that the profits from the Ligand short position were allegedly
Even before the Commission brought this action, in a Wells submission, the undersigned
explained that this theory was both groundless and unprecedented. DSB Aff. ¶ 16. Among other
Not surprisingly then, in the 11 years since Rule 206(4)-8’s promulgation, the
Commission has never used it to bring an enforcement action against a fund
manager for statements concerning a specific stock. We surveyed the 983
litigation releases, 24 enforcement releases, and 283 news and public statement
releases (and associated complaints, judgments, and orders) concerning Rule
206(4)-8 available on www.sec.gov as of June 14, 2018, as well as the 69 cases
and 56 administrative decisions concerning the Rule available on Westlaw as of
June 14, 2018, and have not found a single instance in which the Commission
brought an enforcement action against an investment advisor under Rule 206(4)-8
for statements about another company.
Id. at ¶ 17. In its zeal to punish Fr. Lemelson any way it could, the Commission ignored the
The Commission also brought this claim notwithstanding a complete lack of due
diligence as to its factual underpinnings. Incredibly, the Commission never even bothered to
speak with any of Fr. Lemelson’s investors. ECF No. 126 ¶ 123. Then, after bringing its
baseless IAA claim, the Commission deposed Fr. Lemelson’s longest and largest investor, a liver
transplant specialist and hospital director. ECF No. 126 ¶¶ 139-140. The investor testified that
he never had any concern about Fr. Lemelson’s candor or truthfulness. Id. ¶ 140. Indeed, the
Commission presented no evidence that in the 14 years Fr. Lemelson has worked as an advisor
Moreover, the entire basis of this claim rested on the Commission’s theory that Fr.
Lemelson profited from the alleged scheme. Yet the Commission never produced any evidence
purportedly tying Fr. Lemelson’s profits to any of the alleged wrongdoing, and the Court
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accordingly denied the Commission’s misguided demand for disgorgement. ECF No. 273. And,
of course, as set forth above, the scheme claim itself was without basis. Still, the Commission
recklessly plowed ahead with its novel and meritless IAA claims at trial. The jury soundly
rejected them.
II. Fr. Lemelson is Independently Entitled to Attorney’s Fees and Costs Because the
Commission’s Sanction Demands Were Unreasonably Excessive
“the demand by the United States is substantially in excess of the judgment finally obtained by
the United States and is unreasonable when compared with such judgment ... under the facts and
circumstances of the case.” § 2412(d)(l)(D). “While (d)(1)(A) only awards fees to parties that
prevail against the government—and only where the government action is not substantially
justified—(d)(1)(D) awards fees to parties against whom the United States obtains a judgment,
with no exception for substantial justification.” United States v. One 1997 Toyota Land Cruiser,
248 F.3d 899, 904 (9th Cir. 2001) (Toyota Land Cruiser). This alternative statutory provision is
“aimed at forcing ‘government attorneys ... [to] adjust their actions ... and not routinely issue ...
demands at the high end of the scale merely as a way of pressuring small entities to agree to
quick settlements.” Id. (quoting 142 Cong. Rec. E571–01, E573 (1996) (statement of Rep.
“Under this subsection, the party seeking fees bears the burden of proving (i) that the
government’s demand was substantially in excess of the award obtained by the judgment and (ii)
that the government's demand was unreasonable compared to that judgment.” United States ex
rel. Wall v. Circle C Constr., LLC, 868 F.3d 466, 469–70 (6th Cir. 2017). The term
“unreasonable” is defined as “justified to a degree that could satisfy a reasonable person.” Id. at
470. In Wall, the court held that a government demand of $1.66 million while “finally
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obtaining” $14,748 was substantially in excess of the judgment” because it was “fairyland rather
than actual.” Id. at 470. Likewise, in Toyota Land Cruiser, the court held that the government’s
$40,000 demand and ultimate settlement of $1,000 was excessive. 248 F.3d at 906.
Section 2412(d)(1)(D) is easily satisfied here. Indeed, the disparity between the demand
and the final judgment is striking. In the Complaint, the Commission initially sought
disgorgement of Fr. Lemelson’s alleged “ill-gotten” gains, which it pegged at over “$1.3
mention untethered to the facts or the reality of the verdict) and is reflective of its overall
position in this litigation. Specifically, after the verdict, the Commission clarified that it was
seeking to disgorge Fr. Lemelson’s personal interest in the Amvona Fund based on $1.3 million
in alleged “ill-gotten gains.” ECF No. 245 at 8. The Commission sought $656,500 in civil
monetary penalties from Fr. Lemelson. Id. Further, the Commission sought an additional
$775,000 penalty against LCM, the maximum penalty for entities under Section 21(d)(3)(B)(iii)
of the Exchange Act (adjusted for inflation). Id. at 9. Lastly, the Commission sought $208,624
in prejudgment interest. Id. at 15. All told, despite losing on the majority of its claims including
the core scheme to defraud and the insolvency claims cited in its press release, the Commission
The Commission got a small sliver of what it sought.—both in terms of its demand at the
outset of the case and after the verdict. The Commission received no disgorgement, only a five-
year injunction (rather than permanent), and just a $160,000 civil fine. It recovered under 7% of
its post-verdict demand and recovered none of the disgorgement it demanded in its Complaint.
To declare this anything but an embarrassing defeat for the Commission would be disingenuous.
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In short, the judgment demonstrated that the Commission’s demand was “fairyland rather than
actual.” Wall, 868 F.3d at 470. As stated by a former high-ranking Commission attorney: “The
Commission brought the widest array of potential claims against Lemelson and his company, and
his decision to fight the charges paid off. Most importantly, he turned a lifelong injunction into a
term of years. He also succeeded in protecting his advisory business and the fund it managed
from any liability whatsoever.” DSB Aff. ¶ 12; Ex. 6. Indeed, the Commission tacitly
acknowledged that its sanction demands were excessive by not cross-appealing the Court’s
judgment, including its award of no disgorgement. Under the circumstances, the EAJA
mandates that the Commission should pay the fees and costs Fr. Lemelson incurred.
exception, any such argument must fail. The statute provides for an exception where a party
“has committed a willful violation of law or otherwise acted in bad faith, or special
circumstances make an award unjust.” 28 U.S.C. § 2412(d)(1)(D). Fr. Lemelson should not be
disqualified on this basis. For the three statements on which the jury found Fr. Lemelson liable,
the Commission never even specifically alleged—and the jury made no finding of—willfulness.
Instead, consistent with Rule 10(b)(5), the jury found only that Fr. Lemelson “intentionally or
recklessly made untrue statements of a material fact, or omitted to state a material fact . . .” ECF
No. 232 (emphasis added). As an initial matter, given that the jury found Fr. Lemelson not liable
for a scheme to defraud, it is likely that the jury’s finding on the three statements was based on
recklessness. In any event, there can be no legal basis for invoking the “willfulness” exception
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III. The Presumptive Hourly Rate Under the EAJA Should be Increased
The EAJA provides that “attorneys shall not be awarded in excess of $125 per hour
unless the court determines that an increase in the cost of living or a special factor, such as
limited availability of qualified counsel for the proceedings, justifies a higher fee. 28 U.S.C. §
2412(d)(1)(D)(2)(A).
In terms of the cost of living, the $125 figure was put in place in 1996, when Congress
WL 417595, at *3 (N.D. Ill. July 20, 1998). The cost of living has of course increased
significantly in the quarter century between the statute’s amendment and the trial in this case,
and the Commission brought this action in a major metropolitan area with a particularly high
cost of living. For example, in a survey reported in Massachusetts Lawyers Weekly over a
decade ago, the average hourly rate for a partner in Boston was $598.69—more than $100 in
excess of the reduced hourly rate charged by the undersigned partners. DSB Aff ¶ 7, Ex. 11.
Accordingly, the $125 per hour figure should no longer be considered presumptive. Moreover,
in light of the specialized skill and qualifications of defense counsel, an increase in the hourly
In similar actions brought by the Commission, courts generally increase attorney’s fees
under the EAJA. For example, in S.E.C. v. Coffman, No. CIV06CV-00088REB-BNB, 2008 WL
4452334, at *3 (D. Colo. Sept. 30, 2008), the court found higher fees were justified for the
defense counsel based on their “specialized qualifications in the areas of securities law.” Id.
Thus, the court increased the awarded attorney’s fees to the amount similarly specialized
attorneys were charging in the Denver area. Id. Likewise, in S.E.C. v. Wilson, No. 04-CV-1331
(JCH), 2009 WL 2381954, at *11 (D. Conn. July 31, 2009), the court concluded that an increase
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in attorney’s fees was warranted in light of defense counsel’s specialized qualification in
securities litigation:
In both trials, it was clear that the key to Wilson’s defense was identifying,
analyzing, and communicating to the jury the flaws in the SEC’s case. While
poking holes in an opponent's argument is undoubtedly “general lawyerly
knowledge and ability useful in all litigation,” in this case, the infirmities of the
plaintiff's theory were only visible, in the first instance, to someone with an
intimate knowledge of the inner workings of the securities broker-dealer industry.
Id. The court accordingly found that the defense counsel’s “specialized training on the minutiae
of ... SEC enforcement proceedings which could not be obtained by a competent practicing
attorney through routine research or legal experience,” and awarded a higher rate. Id. at *10.
Here, as set forth in the affidavit of lead trial counsel, Douglas S. Brooks, defense
counsel possessed specialized qualifications in the areas of white collar defense, including
securities law, and SEC enforcement proceedings, see Coffman, 2008 WL 4452334, at *3,
“which could not be obtained by a competent practicing attorney through routine research or
Accordingly, Fr. Lemelson respectfully requests that the Court increase the presumptive
rate to that reflected in the firm’s attached invoices. See DSB Aff. ¶ 3; Ex.1.
CONCLUSION
For the foregoing reasons, the government is responsible for fees and costs under the
EAJA because Fr. Lemelson was the prevailing party on claims where the Commission’s
position was not substantially justified, and the Commission’s demands were excessive when
compared to the final Judgment. He respectfully requests the government pay $1,789,051.64
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Respectfully Submitted,
CERTIFICATE OF SERVICE
I hereby certify that this document filed through the ECF system will be sent
electronically to the registered participants as identified on the Notice of Electronic Filing (NEF)
and paper copies will be sent to those indicated as non-participants.
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