Supreme Court to Decide Validity of SEC Disgorgement Actions
On November 2, 2019, the United States Supreme Court granted the petition for a writ of certiorari in Liu v. SEC to address whether the Securities and Exchange Commission (the “SEC”) has authority to recover disgorgement of ill-gotten profits from violators of the federal securities laws.1 This decision comes after the Ninth Circuit upheld the District Court’s order, which awarded summary judgment to the SEC with respect to its claim that Liu and his wife committed securities fraud by raising approximately $27 million from Chinese investors under the EB-5 Immigrant Investor Program in 2018.2 The Ninth Circuit affirmed the District Court’s award of disgorgement in the full amount Liu raised from investors.
Before the Ninth Circuit, Liu argued that the Supreme Court’s decision in Kokesh v. SEC, which held that disgorgement is a “penalty” subject to the five year statute of limitations for SEC enforcement actions, demanded the conclusion that the SEC cannot collect disgorgement from violators of the federal securities laws.3 In Kokesh, the Supreme Court stated, “Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.”4 The Ninth Circuit rejected Liu’s argument, in a single paragraph, as incompatible with well-established precedent.5
Liu now asks the Supreme Court to address squarely the validity of SEC actions seeking disgorgement, arguing that, given Kokesh, disgorgement is an invalid “penalty” that Congress has not approved for SEC actions.6 Liu’s argument quotes extensively from the transcript of oral argument in Kokesh, where Justices Kennedy, Sotomayor, Alito, Roberts, and Gorsuch expressed doubts that the SEC can validly seek disgorgement absent authorization from Congress. For example, Justice Gorsuch stated, “because there’s no statute governing it [i.e., disgorgement]. We’re just making it up.”7 But, as noted by the SEC, “Every court of appeals and every district court that has considered the issue after Kokesh has determined that nothing in that decision calls into question the availability of disgorgement in SEC enforcement actions.”8
The stakes of this case for the future of SEC enforcement actions are high. As the Ninth Circuit observed, if the Supreme Court sides with Liu, it will upend the “longstanding precedent on this subject” issued by lower courts.9 But perhaps more importantly, a ruling for Liu would deprive the SEC of a powerful tool, which has allowed it to collect large amounts of money from those found to have violated the federal securities laws. In fact, estimates suggest that the SEC recovered $800 million in disgorgement between 2010 and 2017.10 Accordingly, all those interested in the future direction of SEC enforcement actions should follow this case closely.
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1 See Sec. & Exch. Comm’n v. Liu, 754 F. App’x 505 (9th Cir. 2018) (summary order), cert. granted sub nom. Liu v. SEC, No. 18-1501, 2019 WL 5659111 (U.S. Nov. 1, 2019).
2 Liu allegedly used three LLCs—namely: Beverly Proton Center, LLC; Pacific Proton EB 5 Fund LLC; and Pacific Proton Therapy Regional Center—to perpetrate the scheme. See Sec. & Exch. Comm’n v. Liu, 262 F. Supp. 3d 957, 960 (C.D. Cal. 2017).
3 See 137 S. Ct. 1635 (2017); 28 U.S.C. 2462.
4 137 S. Ct. at 1642 n.3.
5 754 F. App’x 509.
6 Brief for Petitioner at 8, Liu v. SEC, No. 18-1501, 2019 WL 5659111 (May 31, 2019).
7 Id. at 9.
8 Brief for Respondent at 9, Liu v. SEC, No. 18-1501, 2019 WL 5659111 (Sept. 2019).
9 754 F. App’x at 509.
10 Verity Winship & Jennifer K. Robbennolt, An Empirical Study of Admissions in SEC Settlements, 60 Ariz. L. Rev. 1, 17-18 (2018).