Supreme Court Sets Limits on SEC’s Ability to Seek Ill-Gotten Gains Relief

The U.S. Supreme Court ruled 8–1 that the SEC may continue to lawfully obtain disgorgement awards as “equitable relief” for fraudulent activities, though the award must be limited to wrongdoers’ net profits.

The U.S. Supreme Court ruled 8–1 that the U.S. Securities and Exchange Commission (SEC) may continue to lawfully obtain disgorgement awards as “equitable relief” for fraudulent activities, though the award must be limited to wrongdoers’ net profits.

Justice Sonia Sotomayor delivered the majority opinion of the court, while Justice Clarence Thomas filed a dissenting opinion.

In 2016, the SEC charged Charles Liu and Xin Wang with defrauding Chinese investors of $27 million that the couple falsely claimed met the requirements of the EB-5 Immigrant Investment Program, which is subject to federal securities laws. The SEC alleged that the couple misappropriated the funds—intended for construction of a cancer-treatment center—by paying themselves generous salaries and diverting the funds to overseas businesses.

Upholding the SEC’s judgement, a U.S. district court in California ordered the couple to pay civil penalties of $8.2 million and $27 million in disgorgement. The couple argued unsuccessfully that the disgorgement award should be offset by millions of dollars of legitimate business expenses.

After the ruling was upheld in a U.S. Circuit Court of Appeals, the couple petitioned the U.S. Supreme Court. (The Supreme Court last took up the issue of disgorgement in 2017 with a ruling that placed a statute of limitations on awards the SEC could obtain but did not explicitly pass judgment on whether “courts possessed the authority to order disgorgement in SEC enforcement proceedings.”)

In writing for the majority, Justice Sotomayor found in examination of equity jurisprudence that courts have long been authorized “to strip wrongdoers of their ill-gotten gains,” though under various labels, e.g., restitution, accounting for profits and disgorgement. However, the Supreme Court has previously recognized that a wrongdoer should not be punished by “paying more than fair compensation.”

The opinion of the Supreme Court set three new limiting principles on disgorgement awards, which could alter the circumstances under which the SEC will bring future cases forward. According to the Harvard Law Review, the SEC has historically obtained significantly larger disgorgement awards than monetary penalties. The new principles are expected to give companies and individuals facing SEC investigations additional tools to use in negotiating resolutions with the SEC.

Source: Liu v. Securities and Exchange Commission (SEC) 591 U.S. (June 2020).