On November 6, 2019, the United States Supreme Court agreed to decide a case that challenged the SEC’s power to seek disgorgement in court as a penalty for securities law violation. In the case of Liu, et al. v. Securities and Exchange Commission, the SEC sued the petitioners, Charles C. Liu and Xin Wang, for violating the federal securities laws. Lin and Wang were found to have defrauded persons who applied for a visa program for foreigners who made large investments in U.S. businesses.
The Securities Exchange Act of 1934 authorizes the SEC to recover injunctive relief, equitable relief, and civil money penalties in such cases. See 15 U.S.C. §§ 77t(b), (d)(1), (3), and (5). The SEC requested the district court to order disgorgement of all the funds Liu and Wang raised from. The District Court granted the request and ordered Liu and Wang to disgorge approximately $26.7 million. The District Court also granted the SEC’s request to impose fines totaling $8.2 million. The Ninth Circuit Court of Appeals affirmed the District Court’s rulings.
The petitioners argued that disgorgement is a penalty that Congress never authorized. Congress authorized the SEC to seek only injunctions, certain civil money penalties, and equitable relief. According to the petitioners, disgorgement falls outside the scope of the relief that is available to the SEC. The petitioners cited to Kokesh v. S.E.C., 137 S. Ct. 1635 (2017), which held that “SEC disgorgement thus bears all the hallmarks of a penalty” and therefore the five-year statute of limitations applicable to SEC penalty claims applies when the SEC seeks disgorgement. The SEC argued that disgorgement orders constituted “equitable relief” that was authorized by the statute and cited numerous lower court cases that agreed. The Supreme Court disagreed, holding that “[D]isgorgement, as it is applied in SEC enforcement proceedings, operates as a penalty.” A footnote in the opinion states that the Court was not taking a position on whether courts have the authority to seek disgorgement in enforcement cases.
The SEC’s response to Lin and Wang’s petition for certiorari argued that the District Court found that the amount of the disgorgement was “a reasonable approximation of the profits causally connected to the [petitioners’] violation.” The Court of Appeals agreed with the SEC, stating that “the proper amount of disgorgement in a scheme such as this one is the entire amount raised less the money paid back to the investors.” The SEC urged the Supreme Court to reject the petition, pointing out that Congress had authorized the SEC to seek disgorgement in three other statutes and that the Court has repeatedly characterized disgorgement as an equitable remedy.
© Andrew Whiteman 2019
*****
For over thirty years, Whiteman Law Firm has handled securities litigation and arbitration cases. Click here for more information about our securities law practice. Please contact us for more information.