Liu v. SEC. & Exch. Comm'n
140 S. Ct. 1936
| SCOTUS | 2020Background
- Petitioners Charles Liu and Xin (Lisa) Wang raised nearly $27 million from foreign investors through an EB-5 offering and diverted most funds to unauthorized marketing, salaries, personal accounts, and an entity controlled by Wang.
- The SEC sued for securities fraud; the district court enjoined petitioners from EB-5 activities, imposed maximum civil penalties, and ordered disgorgement equal to almost all investor proceeds (jointly and severally).
- The Ninth Circuit affirmed the disgorgement award, applying circuit precedent that generally measures disgorgement as the full amount raised less investor repayments.
- This Court previously held in Kokesh v. SEC that disgorgement can be a "penalty" for statute-of-limitations purposes but expressly reserved whether disgorgement may qualify as "equitable relief" under 15 U.S.C. § 78u(d)(5).
- The Supreme Court granted certiorari to decide whether § 78u(d)(5) authorizes disgorgement and, if so, what limits equity imposes; it vacated and remanded so lower courts can ensure any disgorgement complies with equitable constraints.
Issues
| Issue | Plaintiff's Argument (SEC) | Defendant's Argument (Liu/Wang) | Held |
|---|---|---|---|
| Whether § 78u(d)(5) authorizes disgorgement as "equitable relief" | Disgorgement is an equitable, profit‑based remedy that the SEC may seek in civil actions | Disgorgement is punitive (a penalty) and not a traditional equitable remedy | Held: Disgorgement that is limited to a wrongdoer’s net profits and awarded for victims is equitable relief permissible under § 78u(d)(5) |
| Whether disgorgement proceeds may be retained by the Treasury rather than returned to investors | Retaining/provisioning funds for whistleblowers or enforcement functions is permissible in practice, especially when victim distribution is infeasible | § 78u(d)(5) requires relief be "for the benefit of investors"; funds must generally be returned to victims | Held: Generally equitable disgorgement should benefit investors; depositing to Treasury raises unresolved equity questions and must be evaluated on remand |
| Whether joint‑and‑several disgorgement liability is allowable for affiliates/participants | Joint liability may be appropriate where defendants channeled or shared wrongful gains or participated together | Common‑law equity historically limits profits recovery to what accrued to each wrongdoer (no broad joint‑and‑several awards) | Held: Equity typically limits liability to participants’ own gains but allows collective liability in concerted/partner‑type wrongdoing; remand to assess facts |
| Whether courts must deduct legitimate business expenses from disgorgement | SEC and some courts have denied offsets when expenses furthered the fraud | Defendants must be able to deduct legitimate marginal costs so disgorgement equals net profit, not punishment | Held: Courts must deduct legitimate expenses; exception where entire profit of the business results from wrongdoing — lower court must decide application |
Key Cases Cited
- Kokesh v. SEC, 581 U.S. _ (2017) (held SEC disgorgement is a "penalty" for § 2462 but did not decide whether disgorgement can be equitable relief)
- Mertens v. Hewitt Associates, 508 U.S. 248 (1993) (statutory "equitable relief" limited to categories historically available in equity)
- Great‑West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) (statutory references to equitable remedies carry traditional equity limitations)
- Porter v. Warner Holding Co., 328 U.S. 395 (1946) (equity jurisdiction may impose disgorgement/accounting for profits)
- Tull v. United States, 481 U.S. 412 (1987) (described disgorgement of improper profits as traditionally equitable)
- SCA Hygiene Prods. Aktiebolag v. First Quality Baby Prods., LLC, 580 U.S. _ (2017) (accounting for profits has historical roots in equity)
- Kansas v. Nebraska, 574 U.S. 445 (2015) (equitable disgorgement of gains ordered in original‑jurisdiction dispute)
- SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301 (2d Cir. 1971) (early circuit decision authorizing restitution/profits recovery in SEC enforcement)
- SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109 (9th Cir. 2006) (Ninth Circuit precedent limiting offsets against disgorgement)
- Root v. Railway Co., 105 U.S. 189 (1881) (equity principle: wrongdoer should not profit from wrongdoing; foundations for profit‑based remedies)