Liu v. SEC: The U.S. Supreme Court Upholds The SEC's Power To Obtain Disgorgement In Civil Actions, But With Important Limitations

• Published date: 25 June 2020
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Trials & Appeals & Compensation, Securities
• Law Firm: WilmerHale
• Author: Mr Christopher David, Lorraine B. Echavarria, Lori A. Martin, Matthew T. Martens, Nolan J. Mitchell, Jaclyn Moyer, Nicole Rabner, Daniel F. Schubert, Theresa Titolo and Eric D. Wolkoff

On June 22, the Supreme Court held in Liu v. SEC that the SEC may obtain disgorgement in federal court cases, as long as the disgorgement does not exceed a wrongdoer's "net profits and is awarded for victims." The Court's decision is a mixed bag for defendants, as it permits the SEC to seek disgorgement but limits what can be sought and the parties to whom disgorgement can be awarded. Much uncertainty (and therefore litigation) remains.

Key Takeaways

• The SEC has the authority to obtain disgorgement in cases litigated in federal court.
• Disgorgement awards must not exceed a defendant's gains from the illegal activity, net of legitimate expenses.
• Disgorgement awards must be for (although not necessarily to) victims.
• The opinion leaves open important questions, including what to do when it is not feasible to return disgorged amounts to investors; how the obligation to pay disgorgement should be divided, if at all, among multiple defendants; and what should happen when returning net profits to a "victim" will cause a windfall.

I. Facts of Liu v. SEC

Charles Liu and Xin Wang operated an investment fund through which they raised almost $27 million from foreign investors who wanted to qualify for EB-5 visas. The funds were supposedly for building a cancer treatment center in California, but instead, Liu and Wang misappropriated the investors' money for their own benefit and never began construction.

The SEC filed suit in federal court and prevailed against Liu and Wang at summary judgment. The court ordered Liu and Wang to disgorge roughly $26.7 million and imposed the maximum civil penalty authorized by statute.¹ In calculating disgorgement, the district court rejected Liu and Wang's argument that the total should reflect an offset for their legitimate business expenses. The court ordered that Liu and Wang were jointly-and-severally liable for the full amount of disgorgement.

The Ninth Circuit affirmed the lower court ruling. In their petition for certiorari, Liu and Wang argued that the SEC lacked statutory authority to seek disgorgement because it is a punitive rather than an equitable remedy. Alternatively, Liu and Wang argued that in calculating disgorgement, the lower court should have offset the amount that they raised through the offering by their legitimate business expenses, including monies they spent on lease payments and cancer-treatment equipment.

II. The Supreme Court Upholds the SEC's Authority to Obtain Disgorgement in Civil Actions

In Liu, the...