Securities Regulation Daily Lawmakers offer support for SEC disgorgement power in Liu case
Thursday, January 23, 2020

Lawmakers offer support for SEC disgorgement power in Liu case

By Amy Leisinger, J.D.

"Congress has made clear that district courts have authority to order disgorgement for violations of the nation’s securities laws," the officials state.

A group of lawmakers has filed an amicus brief with the Supreme Court in support of the SEC in an action challenging the Commission’s authority to seek disgorgement in district court actions. According to the eight senators and 16 representatives, orders of disgorgement fall within the equitable powers that Congress granted to district courts when hearing cases involving violations of the federal securities laws. Lawmakers have expressly codified this authority in the text of amendments to U.S. securities laws and premised legislation on the existence of district courts’ disgorgement authority, they contend (Liu v. SEC, January 22, 2020).

Fraudulent scheme. According to the SEC, the petitioners (defendants) raised nearly $27 million from foreign investors seeking to use the EB-5 Immigrant Investor Program, which provides a means for foreign nationals who invest in American enterprises to obtain visas. While claiming that the money would fund a cancer-treatment center, they transferred the funds to personal bank accounts and overseas marketers. The district court concluded that the petitioners violated the antifraud provisions of the federal securities laws, and, as a remedy, ordered them to disgorge $26.7 million.

The petitioners appealed, positing that the SEC lacks statutory authority to seek, and the federal courts likewise lack authority to award, disgorgement.

Disgorgement is a proper remedy. According to the lawmakers, the petitioners ignore decades of precedent holding that disgorgement falls within the general equitable powers that Congress gave district courts. Congress has made clear that district courts have authority to order disgorgement of profits obtained as a result of unlawful conduct, they state, and appellate courts have noted that restitution of the profits is appropriate to deprive fraudsters of the gains of wrongful conduct. "The relevant provisions of the [Exchange Act] vest jurisdiction in the federal courts," the brief explains.

Further, the lawmakers argue that Congress has repeatedly codified the availability of court-ordered disgorgement and also has made explicit that courts are authorized to order disgorgement in the text of congressional reports. Congress first confirmed the disgorgement power in the Insider Trading Sanctions Act of 1984, and the report accompanying the legislation noted that "the Commission may request that the court order certain equitable relief, such as the disgorgement (giving up) of illegal profits." Congress again explicitly codified court-ordered disgorgement authority in the text of the Insider Trading and Securities Fraud Enforcement Act of 1988, which referred to offsetting disgorgement against liability. "This provision would make no sense if, as Petitioners argue, disgorgement were not an available remedy," the lawmakers state.

In addition, Congress confirmed the existence of disgorgement authority when it passed the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, according to the lawmakers, as the report accompanying the legislation states that it would "authorize the federal courts to order the payment of civil money penalties, in addition to disgorgement, for a broad range of violations of the federal securities laws." Five years later, the brief notes that Congress again specifically referenced court-ordered disgorgement in the text of the Private Securities Litigation Reform Act of 1995 by stating that funds disgorged as the result of an SEC action in federal court may not be distributed as payment for attorneys’ fees or expenses. The Sarbanes-Oxley Act and the Dodd-Frank Act also contain multiple references to court-ordered disgorgement, and Congress relied on its existence to implement the policies of distributing civil penalties to victims of securities violations and awarding whistleblowers, the brief explains.

"These statutory enactments go ‘far beyond mere inference and implication,’ and rather ‘clearly evince[] a desire’ to maintain court-ordered disgorgement," the lawmakers conclude.

The case is No. 18-1501.

Attorneys: Michael K. Kellogg (Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C.) for Charles C. Liu. Noel J. Francisco, U.S. Department of Justice, for the SEC.

MainStory: TopStory DoddFrankAct Enforcement FraudManipulation SupremeCtNews

Back to Top

Interested in submitting an article?

Submit your information to us today!

Learn More

Securities Regulation Law Daily: Breaking legal news at your fingertips

Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on securities regulation legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.