On November 1, 2019, the United States Supreme Court granted certiorari in Liu v. Securities & Exchange Commission (18-1501) to determine whether the Securities and Exchange Commission can obtain disgorgement in federal court enforcement actions.
The SEC obtains billions of dollars in disgorgement each year. An adverse ruling from the Court would deprive the SEC of one of its most important remedies for securities violations and compel the SEC to reconsider the way it prosecutes its enforcement actions going forward.
Disgorgement has long been one of the most powerful tools in the SEC’s enforcement arsenal. Generally speaking, disgorgement requires that individuals or entities who violate SEC regulations pay back, with interest, any ill-gotten gains, which may then be distributed to the victims of the misconduct. In recent years, disgorgement has come to dwarf all other civil monetary penalties obtained by the SEC in terms of monetary value. In fiscal year 2018, 64% of all monetary relief obtained in SEC enforcement proceedings derived from disgorgement alone, and in fiscal year 2019, that percentage jumped to 74% (roughly $3.25 billion). A pending appeal before the United States Supreme Court, however, threatens to significantly limit—if not eliminate—the SEC’s authority to seek disgorgement in federal district court.
The Liu case stems from an alleged fraud carried out by a California couple, Charles Liu and Xin Wang (“Appellants”), in connection with the United States’ EB-5 Immigrant Investor Program, which enables foreign citizens to obtain immigration visas in exchange for investments in job-creating projects in the U.S. On May 26, 2016, the SEC brought an enforcement action against Appellants in the U.S. District Court for the Central District of California (the “District Court”) for violations of Section 17(a)(2) of the Securities Act of 1953, alleging that Appellants misappropriated approximately $27 million raised from Chinese investors to construct and operate a cancer treatment center in California. In granting the SEC summary judgment on their claims, the District Court ordered injunctive relief, civil monetary penalties, and disgorgement of the entire amount that had been collected from Appellants’ investors.