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Securities and Exchange Commission v. Tsao

United States District Court, D. Maryland

April 4, 2016

SECURITIES AND EXCHANGE COMMISSION, Plaintiff
v.
ERIC I. TSAO, Defendant.

MEMORANDUM OPINION

ROGER W. TITUS UNITED STATES DISTRICT JUDGE

On September 17, 2004, Dr. Eric Tsao (“Tsao”) pled guilty in the United States District Court for the District of Columbia to felony charges of securities fraud and perjury arising out of three incidents of insider trading occurring in a twenty-six month period. On June 2, 2003, the Securities and Exchange Commission (“SEC” or “the Commission”) brought a parallel civil case in this Court against Tsao, which was settled with the entry of a consent judgment entered on September 23, 2004. ECF No. 1; ECF No. 38. The settlement included financial penalties- disgorgement and a civil fine-and imposed a lifetime bar on service as a public company officer or director. ECF No. 38.

On January 8, 2016, Tsao filed a Motion to Reopen Case and Modify Officer-and-Director Bar. ECF No 39. On March 3, 2016, this Court held a hearing on Tsao’s Motion. ECF No. 49. Because Tsao has not met the heavy burden of showing a significant change in factual conditions or the law, or exceptional circumstances that would warrant a modification of the settlement, the Motion will be denied.

BACKGROUND

Tsao’s plea of guilty to felony criminal charges related to insider trading and his settlement of the parallel civil case both arose from allegations that he illegally traded using non-public information he acquired as an executive at MedImmune, Inc., a publicly traded pharmaceutical company. ECF No. 39-1 at 1; ECF No. 45 at 1-2.

On three occasions, Tsao learned through his employment that MedImmune was involved in confidential negotiations with a certain company and then-within days-caused trades to be made in that company’s securities. Id. at 3. The trades were made using a brokerage account that Tsao had opened in his father’s name, even though Tsao contributed all the assets to the account, controlled and monitored the account, drew money from the account to pay his own household expenses, and Tsao’s elderly father lived in Taiwan and had limited English proficiency. Id. In 1999, Tsao made $18, 000 trading U.S. BioScience securities after a supervisor assigned Tsao a due diligence task indicating that MedImmune would soon acquire U.S. BioScience. Id. at 4. In 2000, Tsao illegally traded in ImClone based on his knowledge of confidential agreements between MedImmune and ImClone. Id. at 5. Finally, in 2001, Tsao discovered through his employment that MedImmune was involved in acquisition talks with Aviron, and realized $146, 132 in illicit profits trading in Aviron. Id. at 6.

In 2002, Tsao learned the National Association of Securities Dealers Regulation (“NASDR”) was investigating suspicious trades, including Tsao’s, related to MedImmune’s acquisition of Aviron. Id. at 7. Tsao attempted to conceal his trading activities, first by taking steps to obfuscate his control of the brokerage account, changing the account e-mail and password, and falsely telling the bank that the account had been subject to unauthorized access. Id. at 7-8. Tsao then falsely testified under oath that he had not been responsible for the trades, stating that his father had purchased the U.S. BioScience shares and his wife had purchased the Aviron shares. Id. at 8. To corroborate his story, Tsao induced his wife and his father to lie to the SEC; they, in turn, told the SEC they were responsible for the trades. Id.

As part of his civil settlement with the SEC, Tsao agreed to disgorgement of profits with interest totaling $171, 608, a civil fine of $330, 275, and a lifetime ban on serving as an officer or director of a publicly traded company. ECF No. 45 at 8; see also ECF No. 39-2. In the criminal proceeding, Tsao was sentenced to fifteen months imprisonment, the lowest sentence recommended under the Sentencing Guidelines. Id. at 8; see also ECF No. 45-1 at 1.

In his motion under Rule 60(b), Tsao seeks to reopen the case and set aside the lifetime bar, based in part on his law-abiding conduct and contributions to public health in the past eleven years. ECF No. 39-1 at 2. Following his release, Tsao spent several years working in medical research and development, including at a nonprofit. Id. at 6-7. Since 2014, Tsao has been the chief executive officer and chairman of the board for Synermore Biologics Co., a Taiwanese start-up company funded by a private venture capital firm, Morningside. Id. at 7. Tsao has also been named a director of three other companies in Asia funded by Morningside. Id. at 9. Because of the lifetime officer-and-director bar, Synermore cannot make an initial public offering with Tsao as an officer or director, and Morningside cannot appoint him to the boards or as an officer of the public companies in which it has invested. Id.

ANALYSIS

Tsao seeks relief from a permanent injunction imposed by a consent order. See ECF No. 39-1 at 2. Under Rule 60(b), a court has discretion to relieve a party from a final judgment or order for six reasons. Tsao first argues that it is “no longer equitable” to enforce the injunction, and, therefore, this Court should relieve him from his obligations using Rule 60(b)(5). Id. at 4. Alternatively, he argues that he should be granted relied under Rule 60(b)(6). Id. at 5.

I. Rule 60(b)(5): Relief from Judgment if Prospective Application is Inequitable

a. Legal Standard

Tsao’s primary request for relief is made under Rule 60(b)(5), which provides that “[o]n motion and just terms, the court may relieve a party . . . from a final judgment [or] order . . . [if] the judgment has been satisfied, released, or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable.” Fed.R.Civ.P. 60(b)(5). This rule codifies a court’s inherent power to modify injunctions it has issued, including injunctions entered into by consent. See Thompson v. U.S. Dep’t of Hous. & Urban Dev., 404 F.3d 821, 825-26 (4th Cir. 2005). “[A] party seeking modification of a consent decree bears the burden of establishing that a significant change in circumstances warrants revision of the decree.” Rufo v. Inmates of Suffolk Cty. Jail, 502 U.S. 367, 383 (1992); see also L.J. v. Wilbon, 633 F.3d 297, 304-05 (4th Cir. 2011). The movant may meet this burden by showing changed “factual conditions or . . . law.” Rufo, 502 U.S. at 384. Modification is appropriate “when changed factual conditions make compliance with the decree substantially more onerous[, ] . . . when a decree proves to be unworkable because of unforeseen obstacles[, ] or when enforcement of the decree without modification would be detrimental to the public ...


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