SEC Disgorgement Faces High Court Challenge

SEC Disgorgement Faces High Court Challenge

Recently, the U.S. Supreme Court agreed to review the Securities and Exchange Commission’s (“SEC”) authority to obtain disgorgement.  The case is titled Charles C. Liu, et al. v. Securities and Exchange Commission, CN 18-1501 (“Liu”).  The issue is whether the SEC may seek and obtain disgorgement from a court as “equitable relief” for a securities law violation even though the Supreme Court previously determined that such disgorgement is a penalty.

Specifically, the Liu case involves an appeal by a couple that was ordered to disgorge approximately $27 million for defrauding Chinese investors who believed their investments were being used for a proton therapy cancer treatment center.  The investors were part of the U.S. Immigrant Investor Program, referred to as the EB-5 program, which provides U.S. visas to foreigners who invest at least $1 million in a commercial enterprise that creates at least 10 full-time jobs for Americans.

In the Liu case, Defendants Liu and Wang argued that disgorgement is being used as a penalty in their case because the district court ordered them to surrender even more money than they made from their fraudulent scheme.  They claimed that while the relevant statutes explicitly authorize the SEC to pursue other forms of relief, including civil monetary penalties (within stated limits) and equitable relieve, nowhere has Congress explicitly empowered the SEC to obtain “disgorgement” in judicial proceedings.  The defendants further argued that the SEC’s “sole legal argument” is that disgorgement is authorized as an equitable remedy:  “[b]ut this Court held, in Kokesh v. SEC, 137 S. Ct. 1635 (2017), ‘that SEC disgorgement constitutes a penalty’ and cannot be considered an equitable remedy… the SEC’s legal claim rests on the wholly unsupported proposition that the exact same remedy that the Court concluded was a penalty for purposes of the SEC’s statute of limitations is not a penalty for purposes of the SEC’s remedial authority.”

In Kokesh, the High Court reasoned that disgorged funds at times have been dispersed to the U.S. Treasury instead of investors; the disgorgement remedy is intended to prevent future wrongdoing as opposed to compensating victims.  Also, in Kokesh, the justices declined to take a position on whether courts possess authority to order disgorgement in SEC enforcement proceedings.

An adverse ruling by the Supreme Court in Liu will likely impact SEC enforcement, at least in the short term.  For example, the SEC could seek higher fines in place of disgorgement or even bring more claims in administrative proceedings, as opposed to in federal courts.