Corporate Accountability

Liu v. SEC

In Liu v. SEC, the Supreme Court held that district courts have the authority to order disgorgement for violations of the nation’s securities laws.

Case Summary

Petitioners Charles Liu and Xin Wang obtained nearly $27 million from Chinese investors through an immigrant investor program that provides a pathway for foreign nationals to obtain visas if they invest in American enterprises. Though the Petitioners claimed the money would fund a cancer-treatment center, Petitioners instead transferred millions of dollars to their personal bank accounts and diverted millions more to overseas marketers in violation of the terms of the offering documents. The SEC filed suit in federal court, and the district court concluded that Petitioners violated Section 17(a)(2) of the Securities Act of 1933, which prohibits obtaining money in the offer or sale of any securities through untrue statements or misleading omissions. As a remedy, the district court ordered Petitioners to disgorge $26.7 million, which is the “reasonable approximation of the profits causally connected to [their] violation.” The Ninth Circuit affirmed the decision, and the petitioners appealed to the Supreme Court, arguing that district courts do not have the authority to order disgorgement. In January 2020, CAC filed an amici curiae brief on behalf of members of Congress in support of the SEC’s position that district courts have the authority to order disgorgement for violations of the nation’s securities laws.

Our brief makes two main points. First, we explained that for nearly fifty years, the courts of appeals have unanimously held that disgorgement falls within the general equity powers that Congress gave district courts when they hear cases involving violations of securities laws. This began in 1971 with a Second Circuit decision, SEC v. Texas Gulf Sulphur Co., which was one of the first cases to conclude that district courts have the authority to require disgorgement.

Second, our brief explained that Congress has codified court-ordered disgorgement in the text of a series of securities laws, including the Insider Trading and Securities Fraud Enforcement Act of 1988, the Private Securities Litigation Reform Act, and the Sarbanes-Oxley Act of 2002.  Indeed, Congress has premised key provisions of that legislation on the existence of disgorgement authority, and has woven court-ordered disgorgement into its statutory schemes.

The Supreme Court held that district courts have the authority to order disgorgement of profits in securities cases, reasoning that courts in equity have long had the power to require violators to give up ill-gotten gains and provide restitution to those they wronged.  The Court offered guidelines for determining when district courts can order disgorgement, noting that disgorgement awards should “not exceed a wrongdoer’s net profits,” that they should be confined to the net profits of individual defendants rather than associated parties, and that the calculation of net profits should account for the deduction of reasonable business expenses.  The Court remanded the case to the lower courts to apply that standard in this case.

Case Timeline

  • January 22, 2020

    CAC files an amici curiae brief

    U.S. Sup. Ct. Amici Curiae Brief
  • March 3, 2020

    The Supreme Court will hear oral arguments

  • June 22, 2020

    The Supreme Court issues its decision