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June 22, 2020

Supreme Court Decides Liu v. SEC

On June 22, 2020, the U.S. Supreme Court decided Liu v. Securities and Exchange Commission, holding the SEC may recover disgorgement as a form of equitable relief in a civil enforcement action for securities fraud, provided that (1) the money is returned to wronged investors for their benefit and (2) the amount does not exceed a wrongdoer’s own net profits.

Under 15 U.S.C. §78u(d)(5), the SEC is authorized to recover “equitable relief” in civil actions brought to enforce the securities law. In this case, the SEC brought a civil action against petitioners Charles Liu and Xin Wang, alleging that they committed securities fraud by soliciting and misappropriating millions of dollars from foreign investors under the EB-5 Immigrant Investor Program. The district court found for the SEC, and, among other penalties not at issue, ordered disgorgement equal to the full amount petitioners had raised from investors, less a small amount that remained in petitioners’ corporate accounts. The Ninth Circuit affirmed.

The Supreme Court first agreed that disgorgement is a form of equitable relief that may be awarded under §78u(d)(5). Looking to historical practice, the Court found that “a remedy tethered to a wrongdoer’s net unlawful profits, whatever the name, has been a mainstay of equity courts,” and thus fell within the meaning of “equitable relief” under the statute. To ensure that disgorgement is a form of equitable relief, however, rather than a penalty, the Court recognized several limits on it. First, the “equitable nature of the profits remedy generally requires the SEC to return a defendant’s gains to wronged investors for their benefits,” rather than retaining them for the government. Second, the award typically must be limited to “net profits from wrongdoing after deducting legitimate expenses,” including consideration of the “cost and expense of conducting [a] business” thereby distinguishing between “expenses that might be considered wholly fraudulent” and “legitimate” expenses. Finally, the award must be limited to the individual’s own profits, so although it may be awarded “against individuals or partners engaged in concerted wrongdoing,” it may not be awarded “against multiple wrongdoers under a joint-and-several-liability theory.”

Because it was unclear whether the district court had applied these limits, the Court vacated the judgment and remanded for application of its decision by the Ninth Circuit Court of Appeals.

Justice Sotomayor delivered the opinion of the Court, in which Chief Justice Roberts and Justices Ginsburg, Breyer, Alito, Kagan, Gorsuch, and Kavanaugh joined. Justice Thomas filed a dissenting opinion.

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