Case No. 18-1501 | 9th Cir.
Preview by Andrew Topal
The Securities and Exchange Commission (“SEC”) sued Liu in district court for using investors’ funds in a manner inconsistent with his prior written representations. The district court granted the SEC’s motion for summary judgment and ordered Liu to disgorge nearly $27 million, the full amount Liu raised from investors. The Ninth Circuit affirmed. Liu argues the SEC lacks statutory authority to seek disgorgement in cases brought in district court.
Generally, the SEC can bring enforcement actions for violations of federal securities law through its own administrative proceedings or in a district court. While the SEC is explicitly authorized to pursue “disgorgement” in its administrative proceedings, 15 U.S.C. § 77h-1(e) (2018), district courts are authorized to grant “permanent or temporary injunction[s],” 15 U.S.C. § 78u(d)(1) (2018), and “any equitable relief that may be appropriate or necessary,” 15 U.S.C. § 78u(d)(5) (2018). Disgorgement, an equitable remedy designed to ensure that wrongdoers do not profit from their wrongs, generally requires a wrongdoer to pay his victims the wrongfully received profit. Whether disgorgement is included in the realm of “any equitable relief that may be appropriate or necessary,” 15 U.S.C. § 78u(d)(5), which a district court may grant, is unclear.
In this case, the Court will decide whether the SEC has the statutory authority to seek disgorgement in federal court.
Liu attacks the SEC’s statutory authority to seek disgorgement in district court on five grounds. First, that Congress explicitly authorized the SEC to seek disgorgement through administrative hearings and did not explicitly authorize disgorgement in district court is evidence that Congress did not intend to grant the SEC the authority to seek disgorgement in district court. Second, the Court recently held that SEC disgorgement is punitive. See Kokesh v. SEC, 137 S.Ct. 1635, 1645 (2017). Punishment is generally associated with legal—not equitable—remedies, and this statute only authorizes district courts to grant equitable remedies. Third, the SEC’s actions are not equitable disgorgement because the government—not injured consumers—keeps the disgorged funds. Additionally, while disgorgement is typically calculated according to the wrongdoer’s profit, here—as in most SEC proceedings—it was determined by the victim’s loss, with the court refusing to deduct Liu’s legitimate business expenses. Fourth, disgorgement, “an order to pay money,” is not an injunction and therefore cannot fall within the SEC’s power to seek injunctions. Brief for Petitioners at 34, Liu v. SEC, 18-1501 (U.S. filed Dec. 16, 2019). Finally, Liu argues that the U.S. Code’s other “[s]cattered references” to disgorgement refer only to the SEC’s ability to seek disgorgement through its administrative procedures and are insufficient to implicitly authorize the SEC to seek disgorgement in district court. Id. at 14.
The SEC defends its statutory authority to seek disgorgement in district court. First, the SEC argues that the statute’s repeated use of the word “any” shows Congress’s intent to authorize expansive remedies. Second, the statue explicitly authorizes a court to issue “any equitable relief,” 15 U.S.C. § 78u(d)(5), and disgorgement has “traditionally [been] considered an equitable remedy,” Tull v. United States, 481 U.S. 412, 424 (1987). Additionally, the statute explicitly authorizes injunctions, and disgorgement can be an ancillary remedy to make the injunction effective. Furthermore, the SEC rebuts Liu’s arguments by pointing to (1) a savings clause clarifying that the authorized remedies supplement other actions, (2) Congress’s knowledge of the widespread use of disgorgement as an equitable remedy when it passed the statute, and (3) the fact that punitive features of disgorgement do not strip it of its underlying equitable nature.
This case has the potential to significantly impact both administrative law and the law of remedies. A number of federal agencies, including the FTC and FDA, also use implied equitable power, and almost 100 statutes define remedies by referring to courts’ equitable powers. Not surprisingly, this case has drawn a number of amici, including former agency commissioners and staffers of the SEC and FTC, interest groups, law professors, and at least 24 members of Congress.