Amicus Briefs

Liu v. Securities and Exchange Commission

Status Amicus Brief

Practice area Securities Litigation & Investor Protection

Court Supreme Court of the United States

Case number 18-1501


On January 22, 2020, Cohen Milstein, on behalf of the North American Securities Administrators Association as Amicus Curiae, submitted an amicus brief to the Supreme Court of the United States in support of the respondent in Charles C. Liu and Xin Wang v. Securities and Exchange Commission, No. 18-1501.


The North American Securities Administrators Association, Inc. (“NASAA”) is the non-profit association devoted to protecting investors from fraud and abuse in the offer and sale of securities.

NASAA and its members have an interest in this appeal because they, like their federal counterpart, the Securities Exchange Commission (“SEC”), have a strong interest in enforcing the securities laws to protect investors from fraud and abuse. In order to effectively address the many varieties of investment fraud in an increasingly complex market, securities regulators must have the flexibility to obtain all appropriate remedies, including disgorgement. NASAA and its members regularly encounter a wide variety of frauds in which disgorgement is essential to providing compensation to fraud victims and to deterring fraud.

NASAA members and the SEC regularly work together to address widespread and complex frauds, including frauds arising out of the EB-5 Immigrant Investor Program. For example, in 2014, the Vermont Department of Financial Regulation (“DFR”) began an investigation into an EB-5 fraud involving Jay Peak Inc., a ski resort operated by two residents of Florida and Vermont (“Jay Peak”). After working closely with DFR, in April 2016, the SEC charged the developers of Jay Peak with 52 counts of fraud and the misuse of approximately $200 million in funds from hundreds of investors in 74 countries. Ultimately, DFR and the SEC together obtained nearly $81 million in disgorgement for the benefit of investors from the perpetrators of the Jay Peak fraud.

Similar to the Jay Peak defendants, Petitioners here engaged in an EB-5 Immigrant Investor Program fraud in which they induced fifty investors to invest a total of nearly $27 million dollars, telling investors that the money would fund the constructions of a cancer treatment center. Petitioners, in direct violation of the terms of the offering documents, then misappropriated and funneled that money to themselves and used it to pay for personal expenses, exhausted all but a couple hundred thousand of the money raised, and never even obtaining the required permits to break ground for the cancer treatment center. The District Court ordered the disgorgement of $26.7 million, less than the amount that Petitioners fraudulently took from innocent investors, since – in the court’s opinion – there were no legitimate business expenses incurred by Petitioners. The court of appeals concurred with this assessment.

Question Presented

Whether a district court, in a civil enforcement action brought by the Securities and Exchange Commission, may order disgorgement of money acquired through fraud.

Summary Argument

As this Court made clear just last year: “Congress intended to root out all manner of fraud in the securities industry. And it gave to the Commission the tools to accomplish that job.” Lorenzo v. SEC, 139 S. Ct. 1094 (2019). For more than half a century, the Courts and Congress consistently agreed that one of those “tools” was the SEC’s ability to seek disgorgement in Court.

More than fifty years ago, the Second Circuit first recognized that district courts may require defendants in SEC actions to disgorge their illicit gains “as an ancillary remedy in the exercise of the courts’ general equity powers to afford complete relief.” Texas Gulf Sulphur Co., 446 F.2d 1301, 1307 (1971), cert. denied, 404 U.S. 1005 (1971). Since then, the circuits have uniformly held that disgorgement is an available remedy in the SEC’s enforcement actions. Following this Court’s Kokesh decision, every court of appeals and every district court that considered the issue also uniformly determined that nothing in that decision called into question the availability of disgorgement in SEC enforcement actions. See SEC v. Weaver, 773 Fed. Appx. 354, 356-357 (9th Cir. 2019).

This is unsurprising given that the disgorgement of profits is a “historic equitable remedy.” SEC v. Commonwealth Chem. Securities, Inc., 574 F.2d 90, 95 (2d Cir. 1978) (“Disgorgement of profits in an action brought by the SEC . . . appears to fit” the description of “[a] historic equitable remedy” because “the court is not awarding damages to which plaintiff is legally entitled but is exercising the chancellor’s discretion to prevent unjust enrichment”).

Congress has also repeatedly and expressly recognized court authority to order disgorgement in SEC enforcement actions. See, e.g., Sarbanes-Oxley Act of 2002, § 308(b), 15 U.S.C. 7246(a)(separate civil penalties assessed against securities wrongdoers may “be added to and become part of a disgorgement fund or other fund established for the benefit of the victims of such violation.”); Private Securities Litigation Reform Act of 1995, Pub. L. 104-67, § 103(b), 109 Stat. 737 (codified at Securities Act of 1933 (“1933 Act”) § 20(f), 15 U.S.C. § 77t(f)); Securities Exchange Act of 1934 (“1934 Act”) § 21(d)(4), 15 U.S.C. § 78u(d)(4)) (Prohibition of Attorneys’ Fees Paid From Commission Disgorgement Funds – Except as otherwise ordered by the court upon motion by the Commission, or, in the case of an administrative action, as otherwise ordered by the Commission, funds disgorged as the result of an action brought by the Commission in Federal court, or as a result of any Commission administrative action, shall not be distributed as payment for attorneys’ fees or expenses incurred by private parties seeking distribution of the disgorged funds.).

The Courts and Congress are correct. Without the remedy of disgorgement, regulators would lose a “tool” necessary to deter wrongdoing and compensate victims of fraud. Disgorgement is most often imposed on individual fraudsters and investment advisers who prey on small, unsophisticated retail investors. These retail investors typically lack not only the capacity and resources to monitor their investments, but also to bring suit to recover their losses when they fall victim to fraud. The SEC thus serves an important role in bringing securities enforcement actions that private litigants will not fill. Accordingly, in many circumstances, disgorgement is the primary vehicle through which funds are returned to investors.

Every dollar that is lost to a fraudulent investment is a dollar that is not invested in a legitimate business or market. Requiring disgorgement of these dollars puts the funds back into the hands of investors for future investment. When disgorged funds cannot be returned to investors, they are used by the SEC in ways that benefit the markets and investors, including, compliance and examinations of registrants, investigations of fraudulent schemes, and investor education outreach. Disgorged funds, regardless of whether they flow to identifiable investors (as is typically the case) or the U.S. Treasury, thus further the purpose of the federal securities laws: protecting investors and maintaining market integrity. If the “tool” of disgorgement was suddenly unavailable, the hundreds of millions of dollars returned to fraud victims every year by the SEC would escheat to fraudsters at the direct expense of their victims, and wrongdoers would be emboldened to engage in misconduct in violation of the federal securities laws.