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Liu v. Securities and Exchange Commission

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Supreme Court of the United States
Liu v. Securities and Exchange Commission
Term: 2019
Important Dates
Argument: March 3, 2020
Decided: June 22, 2020
Outcome
Vacated and remanded
Vote
8-1
Majority
Sonia Sotomayor • Chief Justice John G. Roberts • Ruth Bader Ginsburg • Stephen Breyer • Samuel Alito • Elena Kagan • Neil Gorsuch • Brett Kavanaugh
Dissenting
Clarence Thomas


Liu v. Securities and Exchange Commission is a 2020 United States Supreme Court case in which the court limited the Securities and Exchange Commission's (SEC) power to ask courts to issue disgorgement orders, which require wrongdoers to give up money gathered illegally.[1] Though Liu challenged the agency's authority to seek disgorgement orders, the Supreme Court's decision did not ban the practice entirely.[2] The court ruled that the SEC could ask for disgorgement orders that are less than or equal to the wrongdoer's net profit if the money goes to repaying any victims.[3]

The case came up during the court's October 2019-2020 term.

You can review the lower court's opinion here.

HIGHLIGHTS
  • The case: The Securities and Exchange Commission (SEC) sued business partners Charles Liu and Lisa Wang, alleging that they had misappropriated funds and defrauded investors in their EB-5 visa business. A district court ruled in favor of the SEC, finding that Liu and Wang violated the Securities Act of 1933, and imposed civil penalties in addition to a disgorgement order requiring Liu and Wang to surrender to the SEC the millions of dollars they raised from investors. The Ninth Circuit affirmed the lower court's ruling and Liu and Wang appealed to the U.S. Supreme Court. They argued that the SEC lacked the legal authority to ask the district court to impose a disgorgement order.
  • The issue: Whether the Securities and Exchange Commission may seek and obtain disgorgement from a court as equitable relief for a securities law violation even though the U.S. Supreme Court has determined that such disgorgement is a penalty.
  • The outcome: The U.S. Supreme Court vacated and remanded the 9th Circuit's opinion, holding that the SEC has the legal authority to ask for disgorgement orders that do not exceed the net profit gained by the wrongdoer as long as the money goes toward repaying any victims.[3]


    • Why it matters: The U.S. Supreme Court limited the scope of disgorgement orders the SEC can seek in court to penalize people who violate regulations.

    Timeline

    The following timeline details key events in this case:

    • June 22, 2020: The U.S. Supreme Court vacated and remanded the 9th Circuit's opinion.
    • March 3, 2020: Oral argument was heard.
    • November 2, 2019: The U.S. Supreme Court agreed to hear the case.
    • May 31, 2019: Liu and Wang filed a petition with the U.S. Supreme Court.
    • October 25, 2018: The United States Court of Appeals for the 9th Circuit ruled that the Securities and Exchange Commission (SEC) could get an order from a district court requiring those who violate securities law to disgorge, give up, money they received from investors.[4]
    • April 20, 2017: U.S. District Court for the Central District of California ruled in favor of the SEC.
    • May 26, 2016: SEC sued Liu and Wang for allegedly defrauding investors.

    Background

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    SEC sued Liu and Wang over their EB-5 green card business

    Charles Liu and Xin (Lisa) Wang are California business partners who had been raising money from investors under the EB-5 green card program run by U.S. Citizenship and Immigration Services. The EB-5 program allows entrepreneurs to apply to be U.S. permanent residents if they invest in a U.S. business and plan to create or keep 10 permanent full-time jobs for U.S. workers.[5] Liu and Wang's business was selling membership to a company that would lend money to build a cancer treatment center in California. Chinese immigrant investors paid around $27 million hoping to receive visas through the EB-5 program.[4]

    The Securities and Exchange Commission (SEC) sued Liu and Wang, alleging that they had misappropriated funds and defrauded their investors. The U.S. District Court for the Central District of California ruled in favor of the SEC and found that Liu and Wang violated the Securities Act of 1933. The court held that Liu and Wang misused $12.9 million paying marketing firms to attract new investors, paid themselves $8.2 million in salaries, and never obtained the required permits to start building the cancer center. The district court ordered disgorgement, return, of the entire amount of money raised from the investors, imposed penalties equal to the salaries Liu and Wang took, and issued a permanent injunction that banned the pair from raising money under the EB-5 program in the future.[4]

    Ninth Circuit Court of Appeals affirmed ruling against Liu and Wang

    Liu and Wang appealed their case to the Ninth Circuit, which upheld the lower court's decision. The Ninth Circuit ruled that the district court had the power to order disgorgement of the total amount of money raised from investors without subtracting what Liu and Wang argued were legitimate business expenses.[4]

    Liu and Wang appealed to the U.S. Supreme Court

    In their petition to the U.S. Supreme Court, Liu and Wang argued that the SEC lacked the legal authority to ask a court to require disgorgement of all the funds raised from their Chinese immigrant investors. Citing Kokesh v. SEC (2017), Liu and Wang argued that because the U.S. Supreme Court ruled that disgorgement was a penalty, instead of a means of remedying harm, the SEC lost the ability to request disgorgement until Congress changes the law. The SEC had been allowed to request disgorgement orders from courts as a way to repay those who were defrauded but not as a punishment for those who violated the law.[1]

    On November 1, 2019, the U.S. Supreme Court agreed to hear the case.[6]

    Questions presented

    The petitioner, Liu and Wang, presented the following question to the court:

    Questions presented:
    • Whether the Securities and Exchange Commission may seek and obtain disgorgement from a court as equitable relief for a securities law violation even though the U.S. Supreme Court has determined that such disgorgement is a penalty.

    Outcome

    The U.S. Supreme Court vacated and remanded the 9th Circuit's decision with an 8-1 ruling that said the SEC has the power to seek disgorgement orders as long as the orders do not exceed the net profit made by the wrongdoer and as long as the money goes toward repaying any victims.[3]

    Justice Sonia Sotomayor delivered the opinion of the court. Chief Justice John Roberts joined the opinion along with Justices Ruth Bader Ginsburg, Stephen Breyer, Samuel Alito, Elena Kagan, Neil Gorsuch, and Brett Kavanaugh.

    Justice Clarence Thomas wrote a dissenting opinion.

    Opinions

    Opinion of the court

    The court ruled that the law allows the SEC to seek disgorgement orders if those orders do not exceed the net profit a wrongdoer made and if the money is awarded for victims.[3]

    In the opinion of the court, Justice Sonia Sotomayor argued that seeking disgorgement orders was within the SEC's power "to award 'equitable relief'" under the relevant statute.[3] She argued that the lower courts must now determine whether the SEC reduced the size of this particular disgorgement order to account for legitimate business expenses and whether the agency will award the money to the victims in this case.

    Dissenting opinion

    Justice Clarence Thomas argued in his dissenting opinion that the court was correct to reject the Ninth Circuit's decision, but he said that court was wrong about the SEC's authority to seek disgorgement orders. Thomas claimed that the statute giving the SEC power to seek equitable relief does not include disgorgement orders among the ways the agency can get that relief.[3]

    Text of the opinion

    Read the full opinion here.

    Oral argument

    The U.S. Supreme Court heard oral argument in the case on March 3, 2020.

    Audio

    Audio of oral argument:[7]



    Transcript

    Commentary about the case

    Pre-decision commentary

    Lawrence Hurley, a reporter who covers the U.S. Supreme Court for Reuters, argued that the case "could weaken the agency’s enforcement power" by limiting when the SEC could get disgorgement orders that require "defendants to hand over to the U.S. government money obtained from a fraudulent scheme."[8]

    Amy Howe, an attorney and reporter for SCOTUSblog, argued that a ruling in favor of Liu and Wang "could have a significant impact on the SEC’s enforcement efforts" because "in 2018 the SEC collected $2.51 billion through disgorgement – over a billion dollars more than it collected in civil penalties."[9] Bloomberg News Supreme Court reporter Greg Stohr wrote that the case is "a challenge to one of the agency’s most potent legal weapons."[2]

    A group of lawyers writing for the Morrison Foerster law firm argued that the U.S. Supreme Court's decision "will affect the SEC’s and other regulators’ ability to pursue billions of dollars in what has traditionally been a standard form of equitable relief that courts have routinely awarded."[10] They added that "Liu presents the Court with an opportunity to clarify whether courts are ever authorized to award disgorgement and, if so, whether there are limitations on when disgorgement is appropriate, such as when an award is a means to restoring the status quo rather than an additional penalty for parties that are already subject to statutory civil monetary penalties."[10]

    Post-decision commentary

    The decision by the U.S. Supreme Court "struck a middle ground, rejecting the broad argument that the SEC could never obtain disgorgement of profits from unlawful activity in securities litigation, but sharply cutting back the remedy as the SEC has envisioned it in recent years," according to Columbia Law professor Ronald Mann writing for SCOTUSblog.[11] Mann argued that the case should "bring a significant shift to the SEC’s disgorgement practice, to which the lower courts have been much more receptive than has the Supreme Court."[11]

    See also

    External links

    Footnotes

    1. ↑ 1.0 1.1 United States Supreme Court, ""Charles C. Liu and Xin Wang a/k/a Lisa Wang v. Securities and Exchange Commission, Petition for a Writ of Certiorari," May 31, 2019
    2. ↑ 2.0 2.1 Bloomberg News, "Supreme Court Will Consider Stripping SEC of Disgorgement Powers," November 1, 2019
    3. ↑ 3.0 3.1 3.2 3.3 3.4 3.5 Supreme Court of the United States, "Liu v. SEC," June 22, 2020
    4. ↑ 4.0 4.1 4.2 4.3 United States Court of Appeals for the Ninth Circuit, "Securities and Exchange Commission v. Charles C. Liu, Xin Wang a/k/a Lisa Wang and Pacific Proton Therapy Regional Center LLC," October 25, 2018
    5. ↑ United States Citizenship and Immigration Services, "EB-5 Immigrant Investor Program," accessed November 5, 2019
    6. ↑ United States Supreme Court, "Order List: 589 U.S.," November 1, 2019
    7. ↑ Supreme Court of the United States, "Oral Argument - Audio," accessed March 9, 2020
    8. ↑ Reuters, "U.S. Supreme Court to review SEC's power to recover ill-gotten gains," November 1, 2019
    9. ↑ SCOTUSblog, "Justices add securities-law case to merits docket, extend DACA argument," November 1, 2019
    10. ↑ 10.0 10.1 Morrison Foerster, "The Supreme Court Will Decide Courts’ Authority to Order Disgorgement in SEC Enforcement Cases," November 4, 2019
    11. ↑ 11.0 11.1 SCOTUSblog, "Opinion analysis: Justices accept, but cabin, SEC’s right to disgorgement in securities litigation," June 22, 2020
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