Written by Taher Kameli & Julie Seong
A recent United States Supreme Court decision confirmed that the Securities and Exchange Commission (SEC) can seek disgorgement of ill-gotten gains as an equitable remedy in SEC enforcement actions in federal court. Liu v. SEC was a case involving the SEC and married couple Charles Liu and Xing Wang, who was ordered to pay the $26.7 million they had collected from immigrants and misappropriated.
On June 22, 2020, the Supreme Court’s Liu v. SEC ruling upheld the Securities and Exchange Commission’s ability to recover ill-gotten gains from those who commit financial and securities fraud. There are, however, limits on the disgorgements sought by the SEC that the court must monitor.
Justice Sonia Sotomayor delivered an 8-1 opinion vacating and remanding the 9th Circuit’s decision. The opinion stated that the SEC is authorized to attempt recovering equitable relief in civil proceedings under 15 U. S. C. §78u(d)(5), but those awards must not exceed a wrongdoer’s net profits. They should be sought after to benefit investors who were victims of an alleged fraud. Because that may not always be the motive, the Court emphasized the need for limits to the government’s power. Justice Sotomayor wrote that an equitable remedy should not be turned into a punitive sanction.
Previously, lower courts had authorized SEC disgorgement actions as equitable relief. According to the New York Times, the Supreme Court’s 2017 decision in Kokesh v. SEC reflected their doubts on whether disgorgement was a permissible remedy that agencies could seek and federal district courts could order in civil lawsuits because it was considered to be a penalty. Now, the remedy is allowed but not necessarily absolute. Both parties in Liu v. SEC expressed satisfaction with the Court’s decision.
Although we have yet to see how this decision will be reflected in lower courts, it certainly creates opportunities for innocent third-party victims to challenge federal agencies in future equitable disgorgement attempts. It is likely that relief, outcomes, and the appropriateness of equitable disgorgement for future cases will be a topic of disagreement among courts, governmental agencies, and other parties.
- Liu v. SEC and Relief Defendant Disgorgement Business Law Today Article
- “Oh, What a Relief Liu Is: Liu v. SEC and Relief Defendant Disgorgement.” Business Law Today, American Bar Association, 7 August 2020, https://businesslawtoday.org/2020/08/oh-relief-liu-liu-v-sec-relief-defendant-disgorgement/.
- SEC Business Law Today Article
- “SEC Encourages Disclosure of COVID-19 Impacts by Municipal Securities Issuers.” Business Law Today, American Bar Association, 3 June 2020, https://businesslawtoday.org/2020/06/sec-encourages-disclosure-covid-19-impacts-municipal-securities-issuers/.
- Liu v. SEC case not yet published in the United States Reports
- Liu v. SEC, 140 S. Ct. 1936 (2020)