On Monday, June 22, the U.S. Supreme Court said, in an 8-1 decision, that the U.S. Securities and Exchange Commission could continue collecting disgorgement in an amount that does not exceed a wrongdoer’s net profits and is awarded for victims as “equitable relief.” In rendering its decision, the Supreme Court looked at whether a particular remedy was one that was typically available in equity, relying on two principles. The two principles were that the courts, in equity, are authorized to strip wrongdoers of ill-gotten gains and that remedy is restricted to an individual wrongdoer’s net profits to be awarded to victims.
The Supreme Court declined to decide certain claims relating to the petitioners’ disgorgement, but laid out guidance for the lower courts’ assessment of those claims. In the situation where the proceeds of a wrongdoer’s disgorgement is directed to the Treasury, which did not appear to be the case at hand, the Supreme Court instructed that lower courts may evaluate whether that order would be “appropriate or necessary for the benefit of investors” under 15 U.S.C. § 78u(d)(5). The Supreme Court also directed that the Ninth Circuit may determine, on remand, whether the petitioners can be found liable joint-and-severally or whether individual liability is required. The Supreme Court further instructed that lower courts must deduct legitimate business expenses before awarding disgorgement.
The case involved Charles Liu and his wife, who solicited a total of $27 million from foreign investors for a cancer center that was never built. In its civil action, the SEC sought, among other things, full disgorgement of the $27 million. A federal district court and the Ninth Circuit Court of Appeals upheld the $27 million disgorgement order. Liu appealed to the Supreme Court, calling into question the federal district courts’ ability to order disgorgement.
Liu et al. v. Securities and Exchange Commission, No. 18-1501.