Liu v. Securities and Exchange Commission

The Supreme Court case Liu v. SEC (2020) examined the limits of the SEC's power to seek disgorgement. Petitioners Charles Liu and Xin Wang raised millions from foreign investors through the EB-5 Immigrant Investor Program for a proton therapy cancer center. The SEC sued them, alleging they misappropriated a significant portion of the funds for personal use and other ventures, and a district court ordered them to disgorge almost the full amount raised. Liu and Wang appealed, arguing that the SEC’s disgorgement power is punitive and must be limited by traditional equity principles, restricting recovery to net profits and requiring the money to be returned to defrauded investors. The Court ruled 8-1 in favor of the SEC’s authority to seek disgorgement as an equitable remedy but imposed strict limits: the amount cannot exceed the wrongdoer’s net profits, and the funds must benefit the victims. The case was remanded to the lower courts to ensure compliance with these equitable principles.

The U.S. Supreme Court ruled 8-1 that the SEC may seek disgorgement as an equitable remedy, but established clear limitations. Disgorgement awards cannot exceed the wrongdoer's net profits and must be earmarked for the benefit of the defrauded investors. The case was vacated and remanded to the lower courts for further proceedings consistent with this opinion.

The central dispute was whether the SEC's power to seek disgorgement in civil enforcement actions constitutes an "equitable remedy" and whether it must be limited to a defendant's net profits and distributed to victims, consistent with traditional common law principles, rather than functioning as a punitive penalty payable to the government.

The ruling significantly constrained the SEC’s enforcement powers by imposing strict equitable limits on disgorgement, preventing its use as a punitive tool against defendants. It provided crucial legal clarity for securities law, balancing the government's ability to hold fraudsters accountable with the need to protect investor rights and ensure fair restitution. The decision prompted widespread review of outstanding SEC disgorgement orders and influenced subsequent securities litigation and enforcement strategies.