Securities & Exchange Commission v. Liu, 262 F. Supp. 3d 957

Background

Charles C. Liu created and controlled three entities (Pacific Proton, PPEB5 Fund, Beverly Proton) to raise EB-5 investor capital (≈ $27M) to build a proton therapy center in California; PPEB5 Fund sold interests at $500,000 each plus $45,000 administrative fees.
The offering documents (POM/USCIS filings) promised that Capital Contributions would fund development/operation and that Administrative Fees would pay marketing and offering expenses.
Instead, Liu routed roughly $20M+ of investor proceeds to marketing firms, to himself ($6.7M), and to his wife Xin Wang ($1.54M). Substantial transfers occurred after the SEC subpoenaed Liu in Feb. 2016.
Little to no construction or EB-5-compliant project development occurred; project permits were never obtained and the USCIS designation was later jeopardized/terminated.
Liu and Wang repeatedly asserted the Fifth Amendment in depositions, failed to repatriate ordered funds, and withheld records; the SEC moved for summary judgment and sought injunctive and monetary relief.

Issues

Issue	Plaintiff's Argument (SEC)	Defendant's Argument (Liu/Wang)	Held
Are the EB-5 interests securities?	PPEB5 Fund interests are investment contracts under Howey — money invested in a common enterprise with profit expectation from others’ efforts; POM marketed returns.	EB-5 investments are primarily payments for immigration benefits (green cards), not securities, so securities laws do not apply.	Court: Securities law applies; EB-5 shares are securities (Howey test satisfied).
Did Liu/Wang violate Securities Act §17(a)(2) by misusing proceeds and omitting material facts?	SEC: POM limited Capital Contributions to project use; defendants diverted millions to marketers and personal salaries, which misled investors and omitted material facts.	Liu/Wang: POM allowed managerial discretion and changes; marketing/compensation did not render disclosures untrue.	Court: Summary judgment for SEC on §17(a)(2). Diversions and omissions violated the Act.
Were the omissions/material misrepresentations and negligence established?	SEC: Transfers of ≈$21M (≈75% of proceeds) to insiders/marketers were obviously material; defendants’ conduct showed negligence.	Defendants: Materiality and scienter are jury issues; investors primarily sought visas so misuses were immaterial.	Court: Misappropriation was obviously material as a matter of law; negligence standard for §17(a)(2) satisfied.
Remedies: injunction, disgorgement, civil penalties — appropriate amounts?	SEC: Permanent injunction against EB-5 solicitations; disgorgement of total proceeds minus remaining corporate funds (~$26.73M); third-tier civil penalties (Liu ~$6.7M; Wang proposed ~$5.35M).	Defendants dispute amounts/offsets and contend some expenses were legitimate; argue against severity.	Court: Permanent injunction issued; disgorgement ordered (~$26.73M); civil penalty equals Liu’s personal gain ($6,714,580) and Wang’s personal gain ($1,538,000).

Key Cases Cited

S.E.C. v. Edwards, 540 U.S. 389 (2004) (securities laws broadly cover investments framed as investment contracts)
Reves v. Ernst & Young, 494 U.S. 56 (1990) (broad definition of ‘‘security’’ and statutory scope)
S.E.C. v. W.J. Howey Co., 328 U.S. 293 (1946) (Howey test for investment contracts)
Warfield v. Alaniz, 569 F.3d 1015 (9th Cir. 2009) (focus on what purchasers were offered/promised when assessing expectation of profit)
Goldfield Deep Mines Co. v. S.E.C., 758 F.2d 459 (9th Cir. 1985) (investor motive for nonpecuniary benefits does not preclude securities characterization)
Celotex Corp. v. Catrett, 477 U.S. 317 (1986) (summary judgment burdens)
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986) (genuine issue of material fact standard)
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) (materiality standard for omissions)
Baxter v. Palmigiano, 425 U.S. 308 (1976) (adverse inferences permitted in civil cases when privilege asserted)
Doe ex rel. Rudy-Glanzer v. Glanzer, 232 F.3d 1258 (9th Cir. 2000) (limits/process for drawing adverse inferences from Fifth Amendment assertions)
S.E.C. v. JT Wallenbrock & Assocs., 440 F.3d 1109 (9th Cir. 2006) (disgorgement principles and calculating proceeds)
S.E.C. v. First Pac. Bancorp, 142 F.3d 1186 (9th Cir. 1998) (disgorgement approximation standard)
Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) (scienter definition)
S.E.C. v. Fehn, 97 F.3d 1276 (9th Cir. 1996) (factors for permanent injunction)
S.E.C. v. Murphy, 626 F.2d 633 (9th Cir. 1980) (likelihood of future violations for injunction)