Supporters join SEC’s crusade to save disgorgement

With oral argument looming in a U.S. Supreme Court appeal that could considerably curtail the Securities and Exchange Commission's power to recoup ill-gotten gains from fraudsters, the government and several supporting amici have submitted briefs arguing disgorgement should remain a weapon in the agency's arsenal of enforcement remedies.

The high court will consider in March whether to uphold a 9th U.S. Circuit Court of Appeals decision that both disgorgement -- the return of fraudulently-gained profits -- and civil damages may be wielded against securities law cheats. In its brief urging affirmance filed earlier this month, the government contends longstanding practice, precedent and statutory text sanction the claw-back remedy. Solicitor General Noel J. Francisco also describes disgorgement as a necessary deterrent against the sort of "massive fraud" perpetrated by the appeal's petitioners, Charles Liu and Xin Wang.

The husband and wife pair lured roughly $27 million from Chinese nationals by promising to secure them immigrant visas meant for foreign investors. Instead, Liu and Wang pocketed much of the money and used millions more to perpetuate the swindle.

An SEC enforcement action yielded $8.2 million in civil penalties -- approximately what the couple banked from the scheme -- plus a disgorgement order requiring the return of "the entire amount raised from investors." The 9th Circuit affirmed that award in a perfunctory unpublished opinion. Securities and Exchange Commission v. Liu, 754 Fed.Appx. 505 (9th Cir., Oct. 25, 2018).

Stephen W. Hall, legal director at the securities law nonprofit Better Markets, which filed its amicus brief in support of the government Wednesday, argues that combined penalty is in keeping with decades of agency enforcement.

"The SEC has been getting disgorgement in fraud cases for 50 years," Hall said in a phone conversation Friday.

Maurer School of Law professor Donna M. Nagy, whose amicus brief on behalf of securities law scholars was also filed last week, added that Congress drafted damage provisions presuming they would be applied in tandem with disgorgement.

"The legislative history is crystal clear that Congress took as given that federal district courts would be ordering disgorgement of ill-gotten profits, and that penalties would be in addition to the return of those gains," Nagy said. "Among lots of reasons why the SEC needs disgorgement is the fact that any additional remedies have been predicated on the existence of disgorgement."

Wang and Liu claim they're being doubly and redundantly disciplined with the overlapping punishment. They argue civil penalties suffice because the SEC can assess them equal to "the gross amount of pecuniary gain" a fraud yields. In other words, such penalties could take the place of disgorgement.

In Hall's view that enforcement design would only embolden would-be scammers.

"The SEC needs to have layered penalties, cumulative penalties," He said. "If after this case what the agency is left with is saying to fraudsters, 'Look, give back what you stole,' what kind of deterrent is that?"

"Without disgorgement someone could pay the monetary penalty with ill-gotten gains, which is hardly a penalty," added Nagy.

The petitioners also advance a more technical argument, claiming a recent Supreme Court decision defining disgorgement as a "penalty" means it can't be employed under the securities statute at issue, which allows the SEC to seek "equitable" remedies, a unique variety of relief. Kokesh v. SEC, 137 S. Ct. 1635 (2017).

The government's brief describes that argument as "faulty," and Nagy notes the cited ruling has limited application as it dealt with a narrow statute of limitations question.

"The word penalty has many different meanings in many different contexts," she said. "The fact a certain statute of limitations should apply to disgorgement doesn't take it out of the equitable relief category."

Were the court to reverse the 9th Circuit, Hall said, it would upset longstanding precedent and, he added, could implicate the ability of other executive agencies to seek similar sorts of relief. A group of former Federal Trade Commission officials filed an amicus brief underscoring that worry. Liu v. Securities and Exchange Commission, 18-1501.

"It would be an amazing upheaval of settled jurisprudence," Hall said.

Arguments in the appeal are set to take place March 2.