Liu v. SEC. & Exch. Comm'n
207 L. Ed. 2d 401, 140 S. Ct. 1936 (2020)
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Rule of Law:
A disgorgement award sought by the Securities and Exchange Commission (SEC) constitutes permissible "equitable relief" under 15 U.S.C. § 78u(d)(5), provided that the award does not exceed a wrongdoer's net profits and is awarded for the benefit of investors.
Facts:
- Charles Liu and his wife, Xin Wang, solicited nearly $27 million from foreign investors through the EB-5 Immigrant Investor Program.
- They promised investors that the funds would primarily be used to construct a cancer-treatment center.
- The private offering memorandum specified that only small administrative fees would be used for legal, accounting, and administration expenses.
- Contrary to their representations, Liu and Wang misappropriated nearly $20 million of the investor funds.
- They used the misappropriated funds for marketing expenses, salaries, and diverted a significant portion to personal accounts and a company controlled by Wang.
- Only a small fraction of the collected funds was actually spent on the cancer-treatment center project, such as for a lease and equipment.
Procedural Posture:
- The Securities and Exchange Commission (SEC) brought a civil enforcement action against Charles Liu and Xin Wang in the U.S. District Court for the Central District of California.
- The District Court found in favor of the SEC, imposing civil penalties and ordering disgorgement of the full amount raised from investors, less a small amount remaining in corporate accounts.
- The District Court denied the defendants' request to deduct their business expenses from the disgorgement amount.
- Liu and Wang, as appellants, appealed the District Court's judgment to the U.S. Court of Appeals for the Ninth Circuit.
- The Ninth Circuit affirmed the District Court's order, holding that defendants in a fraudulent scheme are not entitled to deduct their business expenses.
- The U.S. Supreme Court granted Liu and Wang's petition for a writ of certiorari.
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Issue:
Does a disgorgement award that is limited to a wrongdoer's net profits and is intended for the benefit of victims constitute permissible 'equitable relief' that the Securities and Exchange Commission (SEC) is authorized to seek in civil actions under 15 U.S.C. § 78u(d)(5)?
Opinions:
Majority - Justice Sotomayor
Yes. A disgorgement award that does not exceed a wrongdoer's net profits and is awarded for the benefit of investors is a permissible form of equitable relief under § 78u(d)(5). Historically, equity courts possessed the power to strip wrongdoers of their ill-gotten gains through remedies like 'accounting for profits' to prevent unjust enrichment. This power was not punitive and was subject to limitations. The Court holds that § 78u(d)(5)'s grant of 'equitable relief' incorporates these traditional principles. Therefore, a permissible disgorgement award must be limited to the defendant's net profits after deducting legitimate business expenses. Furthermore, the remedy is traditionally awarded for the benefit of victims, and imposing joint-and-several liability is generally improper unless defendants acted as 'partners in wrongdoing.' The Court's prior decision in Kokesh, which classified disgorgement as a penalty for statute-of-limitations purposes, did not decide whether it could be a permissible equitable remedy.
Dissenting - Justice Thomas
No. Disgorgement is not a traditional equitable remedy and therefore can never be awarded under 15 U.S.C. § 78u(d)(5). The statutory term 'equitable relief' is limited to those remedies that were available in the English Court of Chancery at the time of the nation's founding. Disgorgement is a 20th-century judicial invention that lacks the fixed meaning and inherent limitations of traditional remedies like an accounting for profits or a constructive trust. By treating this modern, ill-defined remedy as a form of traditional equity, the majority allows courts and the SEC to circumvent the established limits on equitable power. The Court should have rejected disgorgement outright instead of attempting to 'tame' it by imposing new limitations, a move that will only create further confusion.
Analysis:
This decision significantly clarifies and limits the SEC's authority to seek disgorgement following the uncertainty created by Kokesh v. SEC. While affirming that disgorgement is a permissible remedy, the Court re-tethered it to its traditional equitable roots, requiring that it be remedial rather than punitive. The ruling creates new avenues for defendants to challenge disgorgement awards by arguing for the deduction of legitimate business expenses and contesting joint-and-several liability. Future litigation will likely focus on defining 'legitimate expenses' in fraudulent schemes and the circumstances under which defendants can be considered 'partners in wrongdoing' for liability purposes.
