Liu v. Sec. & Exch. Comm'n

CourtUnited States Supreme Court
Citation140 S.Ct. 1936,207 L.Ed.2d 401
Docket NumberNo. 18-1501,18-1501
Parties Charles C. LIU, et al., Petitioners v. SECURITIES AND EXCHANGE COMMISSION
Decision Date22 June 2020

Gregory G. Rapawy, Washington, D.C., for the petitioners.

Deputy Solicitor General Malcolm L. Stewart for the respondent.

Hervé Gouraige, Sills Cummis & Gross P.C., Newark, New Jersey, Michael K. Kellogg, Gregory G. Rapawy, Benjamin S. Softness, Julia L. Haines, Kellogg, Hansen, Todd, Figel & Frederick, P.L.L.C., Washington, D.C., for Petitioners.

Robert B. Stebbins, General Counsel, Michael A. Conley, Solicitor, Hope H. Augustini, Jeffrey A. Berger, David D. Lisitza, Daniel Staroselsky, Senior Litigation Counsel, Kerry J. Dingle, Senior Counsel, Securities and Exchange, Commission, Washington, D.C., Noel J. Francisco, Solicitor General, Malcolm L. Stewart, Deputy Solicitor General, Vivek Suri, Assistant to the Solicitor General, Department of Justice, Washington, D.C., for Respondent.

Justice SOTOMAYOR delivered the opinion of the Court.

In Kokesh v. SEC , 581 U. S. ––––, 137 S.Ct. 1635, 198 L.Ed.2d 86 (2017), this Court held that a disgorgement order in a Securities and Exchange Commission (SEC) enforcement action imposes a "penalty" for the purposes of 28 U.S.C. § 2462, the applicable statute of limitations. In so deciding, the Court reserved an antecedent question: whether, and to what extent, the SEC may seek "disgorgement" in the first instance through its power to award "equitable relief " under 15 U.S.C. § 78u(d)(5), a power that historically excludes punitive sanctions. The Court holds today that a disgorgement award that does not exceed a wrongdoer's net profits and is awarded for victims is equitable relief permissible under § 78u(d)(5). The judgment is vacated, and the case is remanded for the courts below to ensure the award was so limited.


Congress authorized the SEC to enforce the Securities Act of 1933, 48 Stat. 74, as amended, 15 U.S.C. § 77a et seq. , and the Securities Exchange Act of 1934, 48 Stat. 881, as amended, 15 U.S.C. § 78a et seq ., and to punish securities fraud through administrative and civil proceedings. In administrative proceedings, the SEC can seek limited civil penalties and "disgorgement." See § 77h–1(e) ("In any cease-and-desist proceeding under subsection (a), the Commission may enter an order requiring accounting and disgorgement"); see also § 77h–1(g) ("Authority to impose money penalties"). In civil actions, the SEC can seek civil penalties and "equitable relief." See, e.g. , § 78u(d)(5) ("In any action or proceeding brought or instituted by the Commission under any provision of the securities laws, ... any Federal court may grant ... any equitable relief that may be appropriate or necessary for the benefit of investors"); see also § 78u(d)(3) ("Money penalties in civil actions" (quotation modified)).

Congress did not define what falls under the umbrella of "equitable relief." Thus, courts have had to consider which remedies the SEC may impose as part of its § 78u(d)(5) powers.

Starting with SEC v. Texas Gulf Sulphur Co. , 446 F.2d 1301 (CA2 1971), courts determined that the SEC had authority to obtain what it called "restitution," and what in substance amounted to "profits" that "merely depriv[e]" a defendant of "the gains of ... wrongful conduct." Id. , at 1307–1308. Over the years, the SEC has continued to request this remedy, later referred to as "disgorgement,"1 and courts have continued to award it. See SEC v. Commonwealth Chemical Securities, Inc. , 574 F.2d 90, 95 (CA2 1978) (explaining that, when a court awards "[d]isgorgement of profits in an action brought by the SEC," it is "exercising the chancellor's discretion to prevent unjust enrichment"); see also SEC v. Blatt , 583 F.2d 1325, 1335 (CA5 1978) ; SEC v. Washington Cty. Util. Dist. , 676 F.2d 218, 227 (CA6 1982).

In Kokesh , this Court determined that disgorgement constituted a "penalty" for the purposes of 28 U.S.C. § 2462, which establishes a 5-year statute of limitations for "an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture." The Court reached this conclusion based on several considerations, namely, that disgorgement is imposed as a consequence of violating public laws, it is assessed in part for punitive purposes, and in many cases, the award is not compensatory. 581 U. S., at –––– – ––––, 137 S.Ct., at 1643-1644. But the Court did not address whether a § 2462 penalty can nevertheless qualify as "equitable relief " under § 78u(d)(5), given that equity never "lends its aid to enforce a forfeiture or penalty." Marshall v. Vicksburg , 15 Wall. 146, 149, 21 L.Ed. 121 (1873). The Court cautioned, moreover, that its decision should not be interpreted "as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings." Kokesh , 581 U. S., at ––––, n. 3, 137 S.Ct., at 1642 n. 3. This question is now squarely before the Court.


The SEC action and disgorgement award at issue here arise from a scheme to defraud foreign nationals. Petitioners Charles Liu and his wife, Xin (Lisa) Wang, solicited nearly $27 million from foreign investors under the EB–5 Immigrant Investor Program (EB–5 Program). 754 Fed.Appx. 505, 506 (CA9 2018) (case below). The EB–5 Program, administered by the U. S. Citizenship and Immigration Services, permits noncitizens to apply for permanent residence in the United States by investing in approved commercial enterprises that are based on "proposals for promoting economic growth." See USCIS, EB–5 Immigrant Investor Program, Investments in EB–5 projects are subject to the federal securities laws.

Liu sent a private offering memorandum to prospective investors, pledging that the bulk of any contributions would go toward the construction costs of a cancer-treatment center. The memorandum specified that only amounts collected from a small administrative fee would fund " ‘legal, accounting and administration expenses.’ " 754 Fed.Appx. at 507. An SEC investigation revealed, however, that Liu spent nearly $20 million of investor money on ostensible marketing expenses and salaries, an amount far more than what the offering memorandum permitted and far in excess of the administrative fees collected.

262 F.Supp.3d 957, 960–964 (CD Cal. 2017). The investigation also revealed that Liu diverted a sizable portion of those funds to personal accounts and to a company under Wang's control. Id. , at 961, 964. Only a fraction of the funds were put toward a lease, property improvements, and a proton-therapy machine for cancer

treatment. Id. , at 964–965.

The SEC brought a civil action against petitioners, alleging that they violated the terms of the offering documents by misappropriating millions of dollars. The District Court found for the SEC, granting an injunction barring petitioners from participating in the EB–5 Program and imposing a civil penalty at the highest tier authorized. Id. , at 975, 976. It also ordered disgorgement equal to the full amount petitioners had raised from investors, less the $234,899 that remained in the corporate accounts for the project. Id. , at 975–976.

Petitioners objected that the disgorgement award failed to account for their business expenses. The District Court disagreed, concluding that the sum was a "reasonable approximation of the profits causally connected to [their] violation." Ibid. The court ordered petitioners jointly and severally liable for the full amount that the SEC sought. App. to Pet. for Cert. 62a.

The Ninth Circuit affirmed. It acknowledged that Kokesh "expressly refused to reach" the issue whether the District Court had the authority to order disgorgement. 754 Fed.Appx. at 509. The court relied on Circuit precedent to conclude that the "proper amount of disgorgement in a scheme such as this one is the entire amount raised less the money paid back to the investors." Ibid. ; see also SEC v. JT Wallenbrock & Assocs. , 440 F.3d 1109, 1113, 1114 (CA9 2006) (reasoning that it would be "unjust to permit the defendants to offset ... the expenses of running the very business they created to defraud ... investors").

We granted certiorari to determine whether § 78u(d)(5) authorizes the SEC to seek disgorgement beyond a defendant's net profits from wrongdoing. 589 U. S. ––––, 140 S.Ct. 451, 205 L.Ed.2d 265 (2019).


Our task is a familiar one. In interpreting statutes like § 78u(d)(5) that provide for "equitable relief," this Court analyzes whether a particular remedy falls into "those categories of relief that were typically available in equity." Mertens v. Hewitt Associates , 508 U.S. 248, 256, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993) ; see also CIGNA Corp. v. Amara , 563 U.S. 421, 439, 131 S.Ct. 1866, 179 L.Ed.2d 843 (2011) ; Montanile v. Board of Trustees of Nat. Elevator Industry Health Benefit Plan , 577 U. S. 136, 142, 136 S.Ct. 651, 193 L.Ed.2d 556 (2016). The "basic contours of the term are well known" and can be discerned by consulting works on equity jurisprudence. Great-West Life & Annuity Ins. Co. v. Knudson , 534 U.S. 204, 217, 122 S.Ct. 708, 151 L.Ed.2d 635 (2002).

These works on equity jurisprudence reveal two principles. First, equity practice long authorized courts to strip wrongdoers of their ill-gotten gains, with scholars and courts using various labels for the remedy. Second, to avoid transforming an equitable remedy into a punitive sanction, courts restricted the remedy to an individual wrongdoer's net profits to be awarded for victims.


Equity courts have routinely deprived wrongdoers of their net profits from unlawful activity, even though that remedy may have gone by different names. Compare, e.g. , 1 D. Dobbs, Law of Remedies § 4.3(5), p. 611 (1993) ("Accounting holds the defendant liable for his profits"), with id. , § 4.1(1), at 555 (referring to "restitution" as the relief that "measures the remedy by the defendant's gain and seeks to force disgorgement...

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