Supreme Court Will Consider Whether the SEC has Authority to Seek Disgorgement

On November 1, 2019, the United States Supreme Court granted a petition for a writ of certiorari in Liu v. SEC.  The petitioners, Charles Liu and his wife Xin Wang, are challenging the authority of the Securities and Exchange Commission (SEC) to seek disgorgement of funds illegally obtained from investors. If the petitioners are successful, the SEC may lose the power to recoup money taken in by wrongdoers.

The Supreme Court’s ruling, which will not come until at least 2020, will be of great importance not only in the SEC context, but also in cases brought by the Federal Trade Commission (FTC), which claims the right to obtain disgorgement under a similar statutory scheme.

The facts of the dispute are simple. Liu and Wang raised more than $27 million from investors, claiming they would use the funds to build and operate a cancer treatment center. A district court in the Central District of California determined that the couple kept about $8.2 million for themselves and never even obtained permits to build the cancer center. In granting summary judgment to the SEC, the district court ordered disgorgement of the entire amount that had been raised from investors, imposed civil penalties equal to the $8.2 million the couple had personally received from the project, and permanently enjoined them from future solicitations of the type that triggered this prosecution.

Building on dicta the Supreme Court wrote in Kokesh v. SEC, 137 S.Ct. 1635 (2017), Liu and Wang appealed to the Ninth Circuit and argued, in relevant part, that the district court lacked the power to order disgorgement. The Ninth Circuit affirmed the $27 million restitution award, and Liu and Wang filed a petition for certiorari with the Supreme Court.

The basis of the petitioners’ argument is that the SEC has legal authority to obtain only injunctive relief, equitable relief or civil monetary penalties in court, but not the right to obtain disgorgement of the full amount taken in from investors. For many years, both the SEC and FTC have obtained disgorgement from federal courts under the guise that disgorgement is a form of equitable relief. While disgorgement as equitable relief does not withstand rigorous intellectual inquiry, outrageous facts like raising and spending $27 million for a cancer center that was never built often discourage sympathy for fraudsters.

Nevertheless, the petitioners persisted with their argument, and may be on the verge of a landmark breakthrough in defendants’ rights. There are several indicators that they could prevail over the SEC. First, the Supreme Court’s Kokesh decision stopped short of barring the SEC from obtaining disgorgement but it did state that disgorgement did not appear to fall into any category of remedies that should be available to the SEC. The Supreme Court wrote, “Disgorgement does not simply restore the status quo, it leaves the defendant worse off.”

Second, there is the grant of certiorari itself, which indicates that at least four justices expressed interest in hearing Liu’s appeal.  The grant of certiorari is an even greater portent than usual, because unlike many cases heard by the Supreme Court, there is no split among the circuit courts. Put another way, the circuit courts unanimously allow the SEC to obtain disgorgement but the Supreme Court decided to hear the appeal anyway. One can reasonably assume they did not do so merely to affirm something not previously in dispute.

Third, the Supreme Court now includes Justice Kavanaugh, who previously sat on the District of Columbia Court of Appeals and appeared to endorse the petitioners’ position in Saad v. SEC, 873 F.3d 297 (D.C. Cir. 2017).

Fourth, arguments against the FTC’s power to claim disgorgement have been gaining traction, culminating in an August ruling, FTC v. Credit Bureau Center, LLC, 937 F.3d 764 (7th Cir. 2019) that a particular section of the FTC Act does not permit the FTC to recover restitution because it is limited to equitable or injunctive relief.

TAKEAWAY: Liu v. SEC will be closely watched from now until it is decided in the Supreme Court’s next term. The ruling will likely reverberate far beyond securities cases into the realm of FTC false advertising and deceptive practices cases and beyond.

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