Liu v. SEC on Disgorgement as a Regulatory Enforcement Remedy

The Supreme Court docket is at the moment contemplating whether or not the Securities and Change Fee could search and acquire financial disgorgement from a federal court docket – versus an administrative physique – as “equitable aid” for securities regulation violations, despite the fact that the relevant statutory provision doesn’t explicitly authorize financial disgorgement and the Supreme Court docket has decided that such disgorgement is a penalty.  The matter is Liu v. Securities and Change Fee the place Charles C. Liu and Xin Wang a/okay/a Lisa Wang are opposing an SEC disgorgement order towards them. 

In Liu, Charles Liu and Xin Wang operated an funding fund.  Based on the SEC, the petitioners wrongfully diverted invested funds.  The SEC filed a lawsuit in U.S. District Court docket and the following choice ordered the petitioners to disgorge roughly $20 million, the quantity they purportedly raised from traders by way of an alleged fraud.  The Ninth Circuit affirmed.  Liu and Wang then petitioned the Supreme Court docket for overview.

In Might 2020, the Supreme Court docket heard oral argument. 

Whereas the SEC argued that disgorgement has lengthy been perceived as an “equitable” treatment and that it acts as a deterrent, the Liu petitioners took the place that the longstanding judicial notion is legally unjustified.  The Liu petitioners primarily did so by relying upon the Supreme Court docket’s current opinion in Kokesh v. SEC. 

In Kokesh, the Supreme Court docket held that SEC disgorgement has a primarily punitive objective, however did so solely within the context of contemplating the relevant statute of limitations.  In truth, the Kokesh Court docket said that “[n]othing on this opinion ought to be interpreted as an opinion on whether or not courts possess authority to order disgorgement in SEC enforcement proceedings.”

Nonetheless, the Liu petitioners argued that Kokesh ought to be utilized in deciding whether or not disgorgement is a penalty.  The Liu reasoned that disgorgement is punitive in nature as a result of cash obtained from defendants shouldn’t be all the time returned to victims, however slightly paid to the U.S. Treasury.  The Liu petitioners additional reasoned that that disgorgement merely can’t be thought of an equitable treatment as a result of “equitable” aid is designed to revive the established order because it existed previous to the fee of the alleged wrongdoing. 

Moreover, the Liu petitioners argue that assuming disgorgement awards are even legally permitted, they need to be restricted to defendants’ internet earnings, slightly than the web loss to aggrieved traders.  Based on the Liu petitioners, “legit” enterprise bills incurred by defendants ought to be deducted when calculating internet earnings.  Based on the SEC, nevertheless, no legit enterprise bills existed as all had some nexus to the alleged fraudulent scheme.

It’s not troublesome to see how, from a digital promoting and advertising and marketing standpoint, the end result in Liu is prone to lengthen to Federal Commerce Fee federal judicial enforcement actions and associated protection methods, together with methods in the course of the investigational part.  The FTC wields the specter of disgorging ill-gotten positive aspects as a “equitable” remedial menace.  The company additionally routinely seeks awards of “equitable” financial aid underneath Part 13(b) of the FTC Act in enforcement actions, as measured by customers’ loss – in impact, requiring defendants to pay greater than they ever truly pocketed.

If the Supreme Court docket strikes down solely or extra narrowly limits the SEC’s authority with respect to disgorgement awards and the way such awards are calculated, the FTC could face extra aggressive authorized challenges that disgorgement underneath the FTC Act can also be a penalty, that the treatment doesn’t fall throughout the scope of equitable aid allowed by Part 13(b), and that  award calculations ought to be based mostly upon income, much less legit bills.  The FTC could discover itself having to rethink its enforcement insurance policies which, in flip, might lead to fewer judicial promoting enforcement actions with comparatively massive financial recoveries.

Whereas all eyes are at the moment on Liu, there has additionally been a flurry of different judicial exercise associated to the FTC’s enforcement authority, together with: whether or not Part 13(b) authorizes district courts to enter a everlasting injunctions that order wrongdoers to return ill-gotten cash, and whether or not the   FTC is legally permitted to acquire injunctions towards defendants for alleged previous misconduct.

A ruling in favor of the Liu petitioners might embolden arguments by FTC follow counsel that the company doesn’t possess the authority to acquire equitable financial aid underneath part 13(b) of the FTC Act.

events and defendants are lining up on points in regards to the FTC’s enforcement and remedial authority, together with the company’s continued use of “fairness” to acquire financial awards.  In consequence, the FTC is more and more spending extra time and workers assets battling authorized challenges, shifting enforcement technique and using tolling agreements as a carrot when negotiating extensions of time to reply to civil investigative calls for (CIDs).

There is no such thing as a predicting how the Supreme Court docket will rule with any definitive accuracy.  Nonetheless, if you wish to learn the tea leaves for clues, contemplate that the Supreme Court docket has a observe file of guaranteeing that businesses of the federal authorities train solely the powers that Congress has expressly granted by statute … and FTC disgorgement shouldn’t be traceable to any clear congressional authorization.

Moreover, throughout oral argument, the justices gave the impression to be keen to just accept a center floor, to wit, disgorgement as a treatment if funds are returned to defrauded traders and are restricted to defendants’ internet earnings.  Sensible concerns concerned in finding the previous, and calculating and classifying the latter, would virtually definitely exist.

A call by the Liu Court docket is anticipated shorty.

You may learn the Liu petitioners’ transient, right here.

You may learn the SEC’s opposition transient, right here.

You may learn the Liu petitioners’ reply transient, right here.