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U.S. Securities and Exchange Commission v. Williky

United States District Court, S.D. Indiana, Indianapolis Division

August 3, 2018

GARY S. WILLIKY, Defendant.


          Hon. William T. Lawrence, Judge United States District

         This cause is before the Court on the Securities and Exchange Commission's (“SEC”) Motion for Entry of Judgment, by Consent, of Permanent Injunction and Other Relief, Dkt. No. 34, and Motion for Injunctions, Disgorgement, Civil Penalties, and Entry of Final Judgment, Dkt. No. 38. The motions are fully briefed and the Court, being duly advised, grants the relief set forth below.

         I. Facts

         The parties have entered into a bifurcated settlement agreement in which the parties agree that (1) Gary S. Williky shall be enjoined from violating the provisions of the federal securities laws at issue in the Complaint; (2) Williky shall be enjoined from serving as an officer or director of a public company; and (3) the Court shall determine the financial penalties to be assessed against Williky via motion. Dkt. No. 34-2 at 1-2. The SEC seeks to disgorge Williky of profits and prejudgment interest and to impose civil penalties against Williky. Pursuant to the consent order, Williky is precluded from arguing that he did not violate the federal securities laws as alleged in the Complaint, and the Court is to accept the allegations in the Complaint as true. Dkt. No. 34-2 at 2-3.

         A. Stipulated Wrongdoing

         As noted, the parties have stipulated that the Court is to accept the allegations in the Complaint as true. Dkt. No. 34 at 2. These allegations, in relevant part, are summarized below.

         Gary S. Williky is a 55-year-old resident of Colleyville, Texas, who was an investor-relations consultant for the Evansville, Indiana-based public company Imperial Petroleum, Inc., from February 2010 through December 2011.

         1. Williky's Market Manipulation

         While working for Imperial, Williky attempted to increase Imperial's trading volume, which conveys to investors liquidity of - and public demand for - a stock. Between 2009 and 2012, Williky traded Imperial stock in multiple brokerage accounts. At least three of these accounts were in his wife's name, but Williky controlled all trading in his own accounts and in his wife's accounts. From March 4, 2010, through January 11, 2012, Williky used at least five of these accounts to conduct a series of at least twenty wash and match trades.[1]

         Williky's trading made up a substantial percentage of Imperial's trading volume between at least March 4, 2010, and January 11, 2012. Williky's trades resulted in increased trade volume and a higher stock price. On many days, to increase volume and stock price, Williky both bought and sold Imperial shares. On more than seventy days within that time period, Williky's trading was responsible for more than fifty percent of the trading volume. At least five of his wash and match trades were made on such days. On more than fifteen days, Williky was responsible for one hundred percent of Imperial's trading volume.

         In conducting his manipulative wash and match trades, Williky acted with scienter. He: (1) controlled trading out of each of the relevant accounts, (2) placed the orders for the trades and (3) knew - or recklessly disregarded - that the trades he directed involved no substantive change of beneficial ownership and/or involved orders of substantially the same size and same price, placed at substantially the same time.

         2. Williky's Scalping Emails

         While working for Imperial and personally trading Imperial stock, Williky hired public relations firms to publicize Imperial and personally sent out emails to more than two hundred recipients, including friends, family members, and industry connections. In his emails, Williky promoted Imperial stock without disclosing that he intended to sell his Imperial shares.

         For example, on October 5, 2010, a company Williky hired sent out a news release email reporting that Imperial's projected revenue for 2011 was more than $50 million, that Imperial was net profitable, and that the stock price had recently tripled. Williky then forwarded the message to his personal connections without disclosing that he was employed by Imperial or that he intended to sell Imperial shares.

         Similarly, on December 6, 2010, Williky emailed another message promoting Imperial's stock. He claimed that the company was undervalued by more than four hundred percent and that the stock price, then trading around $0.55, should be in the range of $2.00 to $2.50. Williky again failed to disclose his professional relationship with Imperial or the fact that he intended to sell Imperial shares.

         Finally, Williky sent another mass email promoting Imperial stock on June 14, 2011. Williky told recipients that the stock had risen almost three hundred percent, but he expected that it still had “a long way to go.” He advised “anyone who has not considered becoming a shareholder do so before the stock price is out of current levels of $1.20.” Again, Williky failed to disclose his relationship with Imperial and the fact that he intended to sell Imperial shares.

         In the days immediately following each of these emails - in which he told his family, friends and business connections that Imperial was a great buy - Williky was a net seller of Imperial stock and earned profits of more than $60, 000.

         Williky acted with scienter: he knew when he sent the promotional emails that he had an undisclosed conflict of interest in that he owned - and intended to sell - Imperial shares. This omission was material. A reasonable investor would have considered it important that Williky had a material conflict of interest because at the same time that he was recommending that investors purchase Imperial shares, Williky intended to sell his stock.

         3. Williky's Ownership Levels

         Between 2009 and February 2012, while working for Imperial and trading its stock, Williky acquired millions of shares of Imperial stock. At multiple points throughout this time period, he owned more than five percent of the company's outstanding stock.

         In one example, at the end of August 2010, Williky owned more than 1.67 million shares of Imperial stock. At the time, Imperial had 21, 364, 813 shares outstanding. Thus, Williky owned more than 7.8 percent of Imperial's outstanding stock. He maintained this approximate ownership level until at least October 26, 2010.

         Williky was required to file, but never filed, a beneficial ownership report form with the Commission disclosing that he owned more than five percent of the company's stock.

         4. Williky's Insider Trading

         a. The Imperial Fraud

         Imperial falsely claimed that it produced more than 28 million gallons of biodiesel from at least May 2010 through at least January 2012. In reality, Imperial used middlemen to buy finished biodiesel and created fake invoices falsely describing the biodiesel as “feedstock.”

         By falsely claiming it had produced the biodiesel from raw materials, Imperial was able to illegally claim government incentives and tax credits for biodiesel production and sell the biodiesel for substantially more than its acquisition price. Specifically, Imperial was able to sell the fuel for more than $100 million, realizing gross profits of more than $50 million.

         This illegal and unsustainable business model was hidden from Imperial's investors and prospective investors. Instead, in periodic reports filed with the Commission and provided to shareholders, and in separate statements made to prospective investors, Imperial misrepresented the fundamental nature of its business model by falsely stating that it produced biodiesel from raw feedstock. Imperial failed to disclose that its business was almost entirely illegal and unsustainable because the substantial ...

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