Short-and-Distort Scheme

SEC charges hedge fund manager

Craig S. Warkol, Marc E. Elovitz and Brian T. Daly, Schulte Roth & Zabel LLP
Originally published in the October 2018 issue

On Sept. 12, 2018, the US Securities and Exchange Commission charged the principal of a hedge fund manager and the hedge fund manager itself with illegally profiting from a scheme to drive down the price of Ligand Pharmaceuticals Inc. (“Ligand”), generating approximately $1.3 million in illegal profits. The SEC’s complaint1 charges that Gregory Lemelson and Massachusetts-based Lemelson Capital Management LLC (“LCM”) issued false information about Ligand after Lemelson took a short position in Ligand on behalf of The Amvona Fund (“Amvona”), a hedge fund LCM advised and Lemelson partly owned.

The regulatory action follows the Commission’s stated objective of protecting retail investors and is a continuation of a multi-year effort by the SEC to monitor hedge funds (and others) using social media to disseminate information about public companies.

Alleged misconduct

The SEC alleges that from June through October 2014, Lemelson lied about Ligand on social media, radio programs, written interviews and in papers he published as research reports in an effort to shake investor confidence in the company, lower its stock price and increase the value of his short position. These false claims included that the company was on the brink of bankruptcy and that its investor relations firm agreed with Lemelson’s view that its flagship drug, Promacta, was going to become obsolete.

Lemelson also allegedly misled investors by citing a European doctor’s negative views on Promacta, without revealing the doctor was Amvona’s largest investor and had a significant financial interest in seeing Ligand’s stock price decline. Lemelson allegedly distributed his fraudulent reports to PR Newswire, Street Insider, USA Today and other press resources and worked to have comments critical of him removed from news releases, including his statements on his alleged bias and lack of expertise.

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