On Monday, June 22, 2020, the United States Supreme Court issued a ruling in Liu v. Securities and Exchange Commission, 591 U.S. ___ (2020). In an 8-1 decision, the Supreme Court held that, in civil enforcement cases brought by the Securities and Exchange Commission, “[a] disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under [15 U.S.C.] §78u(d)(5).”
Charles Liu and Xin Wang solicited foreign investors to commit nearly $27 million in the construction of a cancer-treatment center related to the EB-5 Immigrant Investor Program. However, an SEC investigation showed that Liu spent almost $20 million of the investors’ money on marketing expenses and salaries, contradicting the accounting laid out in a private offering memorandum sent to prospective investors. Liu also diverted funds to personal accounts and to a company under Wang’s control. “Only a fraction of the funds were put toward a lease, property improvements, and a proton-therapy machine for cancer treatment.”
The SEC then filed a civil suit against Lin and Wang for violating the terms of the offering documents by misappropriating millions of dollars. The district court found for the SEC and “ordered disgorgement equal to the full amount [Lin and Wang] had raised from investors, less the $234,899 that remained in the corporate accounts for the project.” The Ninth Circuit Court of Appeals affirmed the district court’s ruling. acknowledging that Kokesh v. SEC, 581 U.S. ___ (2017) “‘expressly refused to reach” the issue whether the District Court had the authority to order disgorgement.”
In interpreting §78u(d)(5), Justice Sonia Sotomayor, writing for the majority, analyzed whether a remedy falls into “those categories of relief that were typically available in equity.” Mertens v. Hewitt Associates, 508 U.S. 248, 256. In making this analysis, Justice Sotomayor relied upon two principles of equity jurisprudence: (1) equity practice has traditionally authorized courts to “strip wrongdoers of their ill-gotten gains” and (2) courts have restricted the remedy to an individual wrongdoer’s net profits as an award for victims, thus avoiding the transformation of an equitable remedy into a punitive sanction.
After a dissection of the two principles of equity jurisprudence, Justice Sotomayor analyzed cases in which “courts have occasionally awarded disgorgement in ways that test the bounds of equity practice.” Lin and Wang relied upon Kokesh to argue that disgorgement is necessarily a penalty. However, Justice Sotomayor wrote that “Congress does not enlarge the breadth of an equitable, profit-based remedy simply by using the term ‘disgorgement’ in various statutes. . . Congress’ own use of the term. . . did not expand the contours of that term beyond a defendant’s net profits – a limit established by longstanding principles of equity.”
The Supreme Court vacated the judgment and remanded the case to the Ninth Circuit Court of Appeals. Justice Clarence Thomas dissented on the grounds that disgorgement is not a traditional equitable remedy.
Supreme Court rules disgorgement, with limits, is allowed in SEC civil actions, ABA Journal (June 22, 2020)
Liu v. Securities and Exchange Commission, 591 U.S. ___ (2020)
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