Liu v. Securities and Exchange Commission

LII note: the oral arguments in Liu v. Securities and Exchange Commission are now available from Oyez. The U.S. Supreme Court has now decided Liu v. Securities and Exchange Commission .


Do the federal securities law statutes authorize the Securities and Exchange Commission to obtain disgorgement for violations under the statutes?

Oral argument: 

This case asks the Supreme Court to determine whether the Securities and Exchange Commission (“SEC”) may obtain disgorgement in civil actions under its power to seek equitable relief, even though the Supreme Court has previously ruled that disgorgement is a penalty rather than an equitable remedy at least under some circumstances. Petitioners Liu and Wang contend that the Supreme Court ruled in Kokesh v. SEC that disgorgement was a penalty, and that therefore the SEC lacks the authority to order Liu and Wang to disgorge any ill-gotten gains in connection with their investment fund. The SEC counters that Kokesh held disgorgement to be a penalty only for statute of limitations purposes. The outcome of this case has implications on the SEC’s effectiveness in future civil actions at deterring financial crime and at making the victims of financial crime whole.

Questions as Framed for the Court by the Parties 

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 Supreme Court has determined that such disgorgement is a penalty.


Petitioners Charles Liu (“Liu”) and his wife, Xin Wang (“Wang”), operated an investment fund under the EB-5 Immigrant Investor Program for Chinese investors. SEC v. Liu at 2. The United States Citizenship and Immigration Services (“USCIS”) manages and oversees the EB-5 Immigrant Investor Program. Id. The EB-5 Immigrant Investor Program invites foreign investments into the United States, and such foreign investments must create jobs in the United States. Id. In exchange for the investments, these foreign investors will gain visas to the United States. Id.

Liu and Wang represented to potential investors that the investment fund they operated met the requirements of the EB-5 Immigrant Investor Program because the fund would finance and open a cancer treatment facility in California. Id. To finance the cancer treatment facility, Liu and Wang sold ownership shares of an initial Limited Liability Company (“LLC”) to Chinese investors. Id. Liu and Wang then used the proceeds from the sale of shares in that initial LLC to fund a subsequent LLC. Id. This subsequent LLC thus served as the disbursement vehicle of all funds related to the construction and opening of the cancer treatment facility in California. Id. Specifically, Liu and Wang stipulated in their Private Offering Memorandum that prospective investors must contribute at least $500,000 in “Capital Contribution” towards construction, equipment, and other logistical expenses that were required to open and run the cancer treatment facility, and another $45,000 “Administrative Fee” that went to legal, accounting, and administrative fees that would be incurred in connection with the securities offering. Id.

The United States District Court for the Central District of California (the “District Court”), however, found that Liu and Wang had misappropriated the funds instead of financing the construction of the cancer treatment facility. Id. at 2–3. Specifically, the District Court found that Liu and Wang had spent $12.9 million on marketing, in an attempt to attract new investors. Id. at 3. Additionally, the District Court found that Liu and Wang had awarded themselves approximately $8.2 million in salaries. Id. Despite these outlays, Liu and Wang had not sought the required permits nor filed the necessary paperwork to break ground on the new cancer treatment facility. Id. As such, the District Court granted summary judgment in favor of the Securities and Exchange Commission (“SEC”), and ordered a disgorgement of the full amount that Liu and Wang had collected from investors, minus the amount paid back to investors. Id. at 3, 7.

On appeal to the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”), Liu and Wang argued that the District Court’s order on the amount to be paid to the SEC was erroneous because the District Court lacked power to order disgorgement in favor of the SEC. Id. at 7. In particular, they assert that disgorgement remedies are punitive in nature. Brief of Petitioners, Charles C. Liu, et. al. at 19. Liu and Wang relied on Kokesh v. SEC, which held that penalties did not fall under the SEC’s authority to obtain equitable relief in civil actions. Id. The Ninth Circuit rejected Liu and Wang’s argument, holding that Kokesh did not explicitly render disgorgement the form of a penalty. SEC v. Liu at 7. Further, the Ninth Circuit confirmed the District Court’s holding that the disgorgement amount should be the full amount of money collected from investors minus the amount already paid back to investors. Id. at 8.

Liu and Wang filed a petition for a writ of certiorari with the Supreme Court of the United States on May 31, 2019. Id. The Supreme Court granted certiorari on November 1, 2019. Orders and Proceedings, 18-1501



Petitioners Liu and Wang argue that the SEC is precluded from seeking disgorgement in federal courts because Congress did not authorize the SEC to seek disgorgement in civil actions. Brief of Petitioners, Charles C. Liu et. al. at 15. To begin, Liu and Wang observe that Congress created a comprehensive scheme of remedies that federal agencies must apply to securities law violations. Id. Liu and Wang cite to Massachusetts Mut. Life Ins. Co. v. Russell to support the presumption that an omission by Congress of any given remedy is intentional when Congress explicitly authorized another specific remedy within the same statute. Id. Therefore, Liu and Wang continue, Congress’s omission of any specific authorization for the SEC to obtain disgorgement as a remedy in civil actions, coupled with Congress’s enumeration of alternative remedies that the SEC may obtain, supports the presumption that Congress affirmatively intended to exclude disgorgement as a potential remedy. Id. at 15–16. Moreover, Liu and Wang stress that Congress’s specific endorsement of disgorgement as a potential remedy in SEC’s administrative actions, but not in SEC’s civil actions, bolsters the presumption that Congress intended to deny disgorgement as a remedy in SEC’s civil actions. Id. at 17. Finally, Liu and Wang invoke the language of the Dodd-Frank Act as additional evidence. Id. at 17–18. Specifically, Liu and Wang note that under the Dodd-Frank Act, Congress authorized the Commodity Futures Trading Commission (“CFTC”) to obtain disgorgement “in any action,” while declining to use identical language to describe the SEC’s powers. Id.

Respondent the SEC counters that Liu and Wang have waived, or have at least forfeited, their right to actually dispute whether the SEC lacks the authority to obtain disgorgement in civil actions. Brief of Respondent, Securities and Exchange Commission at 11. Specifically, the SEC asserts, because Liu and Wang failed to raise the issue of the SEC’s authority to obtain disgorgement in civil actions, neither the District Court nor the Ninth Circuit actually passed judgement on the issue. Id. at 12. Consequently, the SEC continues, because the Supreme Court is a court of review, “not of first view,” the question of the SEC’s authority to obtain disgorgement in civil actions is inappropriate for the Supreme Court to decide. Id. As evidence of Liu and Wang’s neglect, the SEC observed that Liu and Wang merely challenged the amount to be disgorged in district court, not whether disgorgement was a proper remedy. Id. Similarly, the SEC observed that in the Ninth Circuit, Liu and Wang conceded that disgorgement could be either an equitable remedy or a penalty and Liu and Wang went on to explain that they were not arguing that the SEC lacks authority to obtain disgorgement. Id. at 11–12.


Liu and Wang argue that Kokesh held that disgorgement was a penalty and therefore fell outside of the SEC’s equitable remedy purview under the securities law statutes. Brief of Petitioners at 19. First, Liu and Wang argue, the SEC imposed disgorgements to protect the public interest rather than to remedy harm suffered by an individual as an equitable remedy is supposed to do. Id. at 23. Second, Liu and Wang point out that the SEC obtains disgorgement orders for amounts far in excess of amounts gained from securities law violations in order to deter others from violating securities laws. Id. at 23–24. Further, Liu and Wang insist that even ignoring Kokesh, the SEC’s disgorgement order nevertheless runs contrary to equity’s historically understood scope and that disgorgement falls outside of the SEC’s power to enjoin. Id. at 19. Specifically, according to Liu and Wang, the Supreme Court has consistently held that a remedy qualifies as an equitable remedy only where that remedy was “typically available in equity” prior to the equity and law merger, and because SEC lawyers invented the modern disgorgement remedy in the 1960’s, disgorgement cannot qualify as an equitable remedy under a historical understanding. Id. at 26–27. Moreover, Liu and Wang continue, a disgorgement is an order to pay money, while an injunction or “enjoinment” is a restraint on the continuation of a wrongful act. Id. at 34. Therefore, Liu and Wang conclude, disgorgements fall outside of the SEC’s authority to enjoin. Id. at 33–34.

By contrast, the SEC argues that the Kokesh holding was narrow, which classified disgorgement as a penalty only for the purposes of 28 U.S.C. § 2642, which deals with statute of limitations for civil actions. Brief of Respondent at 7. The SEC also asserts that the terms “penal” and “penalty” are elastic terms without fixed statutory meanings. Id. at 8. Specifically, the SEC observes that, in Tull v. United States, the Supreme Court characterized disgorgement as both an equitable remedy and a “limited form of penalty.” Id. Furthermore, the SEC maintains that when Congress laid down the SEC’s “equitable relief” authority, Congress was fully aware of lower courts’ expansive interpretation of the “equitable relief” language. Id. at 6. Therefore, the SEC continues, the SEC’s “equitable relief” authority under the securities law statutes must reflect the meaning given to it by lower courts, which would regard disgorgement as within the SEC’s authority to impose. Id. The SEC adds that the structure of certain federal statutes confirms Congress’s intent to include disgorgement under the SEC’s “equitable relief” purview. Id. In particular, the SEC asserts that the Sarbanes-Oxley Act confirms Congress’s intent because it allows civil penalties to be added to and become part of a disgorgement fund established to remedy harm and compensate injured investors. Id. Finally, the SEC asserts that the Supreme Court specifically cautioned that its ruling in Kokesh should not be understood as a holding on whether the SEC had authority to obtain disgorgement in civil actions. Id. at 23



The Securities Industry and Financial Markets Association (“SIFMA”), in support of Liu and Wang, argues that the SEC’s statutory authority under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 to collect civil penalties, combined with the SEC’s authority to order disgorgement, exposes defendants to the risk of paying the SEC twice for the same infraction. Brief of Securities Industry and Financial Markets Association, in support of Petitioners at 25, 26–27. The Cato Institute, also in support of Liu and Wang, argues that the SEC’s disgorgement power allows the SEC to potentially force defendants to pay back money when there is little to no causal connection between the defendants’ infraction and the money that must be paid back. Brief of Cato Institute, in support of Petitioners at 12. For example, the Cato Institute explains that the SEC had imposed on the Chevron Corporation a twenty-five-million-dollar disgorgement fine for incorrectly recording a payment to a foreign official in one case. Id. at 13. The Cato Institute argues that the causal connection between mis-recording a payment and illegally obtaining twenty-five million dollars in profits is tenuous at best. Id. Moreover, the Cato Institute contends that often, the disgorgement amounts that defendants face are disproportionate to the underlying offense because the SEC is given wide latitude to calculate the disgorgement amount. Id. at 11.

The North American Securities Administrators Association (“NASAA”), in support of the SEC, counters that the SEC’s disgorgement remedy is appropriate because disgorgement is both a vital tool in deterring securities law violations and an essential tool in compensating the victims of financial fraud. Brief of North American Securities Administrators Association, in support of Respondent at 13, 19. NASAA argues that disgorgement is vital in deterring potential securities law violations because without disgorgement, there would be much less downside to violating securities laws. Id. at 15. Specifically, NASAA asserts that without disgorgement, ill-gotten gains could exceed civil penalties, thereby incentivizing an economically rational actor to violate the federal securities laws. Id. Moreover, NASAA contends that disgorgement fulfills an essential role in compensating victims of financial fraud who would otherwise have limited alternative means to seek redress. Id. at 19. For instance, NASAA reasons that the types of SEC civil actions where disgorgement is ordered, like fraud or insider trading, typically have little to no accompanying private litigation. Id. Furthermore, NASAA argues that even in actions against public-firm subsidiaries and financial intermediaries, where private plaintiffs occasionally sue alongside the SEC, the SEC is usually more successful. Id.


Americans for Prosperity Foundation (“Foundation”), in support of Liu and Wang, argues that the SEC’s reliance on equitable remedies, such as disgorgement, undermines the rule of law and threatens American citizens’ constitutional rights. Brief of Americans for Prosperity Foundation, in support of Petitioners at 24. Specifically, the Foundation asserts that the SEC’s characterization of monetary damages as “equitable relief” denies defendants their right to a jury trial under the Seventh Amendment. Id. at 25. The Foundation posits that the Supreme Court has interpreted the Seventh Amendment’s jury right protections to be limited to actions where “legal rights” are at play, as opposed to actions where only equitable relief is sought, because actions where only equitable relief is sought involve the protection of public interest and not individual rights. Id. at 26. Therefore, the Foundation argues that the SEC’s mischaracterization of disgorgement as equitable relief effectively negates a defendant’s right to a trial by jury. Id. at 27.

Securities Law Professors (“Professors”), in support of the SEC, counter that the SEC’s authority to impose disgorgement on securities-law violators actually bolsters the rule of law by supporting public policy objectives. Brief of Securities Law Professors, in support of Respondent at 4. While the harm inflicted by securities-law violations is often diffuse, the Professors maintain that violations of federal law harm public interest. Id. at 5. Therefore, the Professors argue, the SEC’s mandate necessarily encompasses both the public’s interest in preventing future violations as well as the vindication of individual victims of financial fraud. Id. at 4. With the foregoing in mind, the Professors rely on Kansas v. Nebraska to illustrate the SEC’s need for remedies such as disgorgement, in order to effectively promote the public’s interest. Id. at 11. According to the Professors, the Kansas court explained that in SEC’s civil actions, an economically rational violator of securities laws would be willing to pay actual damages so long as those damages were less than the overall gains. Id. The Professors thus contend that disgorgement of ill-gotten gains is required to deter future violations and ensure the successful administration of federal securities laws. Id.

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