In its June 2017 decision in Kokesh v. SEC (discussed here), the U.S. Supreme Court held that disgorgement in an SEC enforcement action represents a “penalty,” and therefore a SEC enforcement action claim for disgorgement is subject to a five-year statute of limitation. In reaching this decision, the Court emphasized (in footnote 3 to the opinion) that it was only deciding the statute of limitations issue, and was emphatically not reaching the larger issue of whether the SEC has the proper authority to order disgorgement in enforcement proceeding.
Having previously reserved this larger question in Kokesh, the Court has now agreed to take up a case that will address head-on the question of whether the SEC has the authority to order a disgorgement. On November 1, 2019, the Court granted the petition for a writ of certiorari in the case of Liu v. SEC, which will require the Court to decide whether the SEC may seek may seek and obtain disgorgement from a court as “equitable relief” for a securities law violation even though the Supreme Court determined in Kokesh that disgorgement is a penalty. The Court’s November 1, 2019 order granting the writ of certiorari can be found here.
The case now before the Supreme Court arises out of an enforcement action the SEC brought against Charles Liu and Xin Wang.
The two individuals had organized an EB-5 investment program, through which Chinese investors, in exchange for investment commitments, could obtain a U.S. Visa. The two ultimately raised $27 million from 50 Chinese investors. The investors were told that the money would be used to develop and build a cancer-treatment center. The center was never built. The SEC contends that a substantial amount of the funds raised wound up in the defendants’ overseas bank accounts.
In May 2016, the SEC filed an enforcement action against Liu and Wang. The district court ultimately ordered them to pay $26.7 million in disgorgement – virtually all the money they had raised – as well as a statutory penalty totaling over $8 million. In October 2018, the Ninth Circuit affirmed the district court.
The Cert Petition
In May 2019, Liu and Wang filed a petition to the United States Supreme Court for a writ of certiorari. The petition seeks to have the Court address the question that it declined to reach in Kokesh – that is, whether or not the SEC has the authority to seek and obtain disgorgement as “equitable relief.”
In making this argument, the petitioners noted that under its statutory authority, the SEC, in pursuing an action to enforce the securities laws, may obtain only injunctive relief, equitable relief, or civil monetary penalties. Despite this limitation, the petitioners said, the SEC sought and the Court awarded disgorgement against them. In doing so, the district court relied on pre-Kokesh authority in which disgorgement was interpreted as a form of “equitable relief.”
According to the petitioner, this view of disgorgement as equitable relief “cannot survive this Court’s reasoning in Kokesh.” The Court’s logic in Kokesh, in which the concluded that disgorgement is a penalty, is contrary to the long-standing view pre-Kokesh, that disgorgement was remedial rather than punitive and therefore represents equitable relief. (In making this argument, the petitioners cite at length from a dissenting opinion written by then-Judge Kavanaugh prior to his arrival on the U.S. Supreme Court.)
The petitioners argue further that Congress never authorized SEC disgorgement authority, and that in light of the Supreme Court’s conclusion in Kokesh that disgorgement is a penalty, for the SEC to seek and obtain a disgorgement award exceeds its enforcement authority.
The SEC’s Opposition to the Cert Petition
In its opposition to the cert petition, the SEC raised a number of arguments. Among other things, the SEC argued that the agency’s disgorgement authority arises under its statutory authorization to seek “injunctive relief.” The SEC also argued that there is nothing about the Court’s decision in Kokesh holding that disgorgement represent a penalty that means that disgorgement cannot qualify as an equitable remedy. “A remedy,” the agency argued, “can qualify as a form of equitable relief even though it might also be considered ‘penal’ for some purposes.” Kokesh was a statute of limitations case, the agency argued, and the Kokesh Court’s holding that disgorgement constitutes a “penalty” within the meaning of the relevant statute of limitations is not inconsistent with the proposition that disgorgement represents a form of equitable relief.
The Court will now take up the question it previously reserved in Kokesh. I have say after reviewing the record that the question of the SEC’s authority could not come up in a set of facts less sympathetic to the petitioners. These petitioners are not going to win over many hearts. That said, they do raise an interesting question; the question they raise is not just one that the Kokesh court declined to address but it is also one that it was clear during oral argument in Kokesh that troubled several members of the Court. (There is also that opinion by Kavanaugh when he was on the D.C. Circuit in which he said that if disgorgement was a interpreted to be a penalty it could overturn extensive precedent on the SEC’s remedial authority…)
It remains to be seen how the Court will rule on this case; indeed, the Court has only just taken up the case, and the parties have yet to brief the case and to present their oral arguments.
Just the same it is always interesting when the Court takes up a case that presents the possibility of upsetting long-standing precedent and practices. The fact is that the outcome of any given Supreme Court case is whatever result five justices decide. This case may or may not conclude that the SEC lacks disgorgement authority, but the possibility that the Court could reach that result certainly raises the interest level for this case. In any event, it is going to be interesting when the Court take up a case that will address a question so fundamental to the SEC’s enforcement authority.
And of course, if the Court were to conclude that the SEC lacks disgorgement authority, what would that do to all of the pending cases in which the Court is seeking disgorgement? What it would do to prior cases in which the Court obtained disgorgement? And if the Court were to conclude that the agency lacks disgorgement authority, what it would it do to the SEC’s future enforcement actions and efforts?
Lots of interesting things to think about while this case unfolds… The case should be decided before the end of the current term at the end of June 2020.