Liu et al. v. Securities and Exchange Commission
Certiorari To The United States Court Of Appeals For The Ninth Circuit
No. 18-1501. Argued March 3, 2020--Decided June 22, 2020
To punish securities fraud, the Securities and Exchange Commission is authorized to seek “equitable relief” in civil proceedings, 15 U. S. C. §78u(d)(5). In Kokesh v. SEC, 581 U. S. ___, this Court held that a disgorgement order in a Securities and Exchange Commission (SEC) enforcement action constitutes a “penalty” for purposes of the applicable statute of limitations. The Court did not, however, address whether disgorgement can qualify as “equitable relief” under §78u(d)(5), given that equity historically excludes punitive sanctions.
Petitioners Charles Liu and Xin Wang solicited foreign nationals to invest in the construction of a cancer-treatment center, but, an SEC investigation revealed, misappropriated much of the funds in violation of the terms of a private offering memorandum. The SEC brought a civil action against petitioners, seeking, as relevant here, disgorgement equal to the full amount petitioners had raised from investors. Petitioners argued that the disgorgement remedy failed to account for their legitimate business expenses, but the District Court disagreed and ordered petitioners jointly and severally liable for the full amount. The Ninth Circuit affirmed.
Held: A disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under §78u(d)(5). Pp. 5–20.
(a) In interpreting statutes that provide for “equitable relief,” this Court analyzes whether a particular remedy falls into “those categories of relief that were typically available in equity.” Mertens v. Hewitt Associates, 508 U. S. 248, 256. Relevant here are two principles of equity jurisprudence. Equity practice has long authorized courts to strip wrongdoers of their ill-gotten gains. And to avoid transforming that remedy into a punitive sanction, courts restricted it to an individual wrongdoer’s net profits to be awarded for victims. Pp. 5–14.
(1) Whether it is called restitution, an accounting, or disgorgement, the equitable remedy that deprives wrongdoers of their net profits from unlawful activity reflects both the foundational principle that “it would be inequitable that [a wrongdoer] should make a profit out of his own wrong,” Root v. Railway Co., 105 U. S. 189, 207, and the countervailing equitable principle that the wrongdoer should not be punished by “pay[ing] more than a fair compensation to the person wronged,” Tilghman v. Proctor, 125 U. S. 136, 145–146. The remedy has been a mainstay of equity courts, and is not limited to cases involving a breach of trust or fiduciary duty, see Root, 105 U. S., at 214. Pp. 6–9.
(2) To avoid transforming a profits award into a penalty, equity courts restricted the remedy in various ways. A constructive trust was often imposed on wrongful gains for wronged victims. See, e.g., Burdell v. Denig, 92 U. S. 716, 720. Courts also generally awarded profits-based remedies against individuals or partners engaged in concerted wrongdoing, not against multiple wrongdoers under a joint-and-several liability theory. See, e.g., Ambler v. Whipple, 20 Wall. 546, 559. Finally, courts limited awards to the net profits from wrongdoing after deducting legitimate expenses. See, e.g., Rubber Co. v. Goodyear, 9 Wall. 788, 804. Pp. 9–12.
(3) Congress incorporated these longstanding equitable principles into §78u(d)(5), but courts have occasionally awarded disgorgement in ways that test the bounds of equity practice. Petitioners claim that disgorgement is necessarily a penalty under Kokesh, and thus not available at equity. But Kokesh expressly declined to reach that question. The Government contends that the SEC’s interpretation has Congress’ tacit support. But Congress does not enlarge the breadth of an equitable, profit-based remedy simply by using the term “disgorgement” in various statutes. Pp. 12–14.
(b) Petitioners briefly claim that their disgorgement award crosses the bounds of traditional equity practice by failing to return funds to victims, imposing joint-and-several liability, and declining to deduct business expenses from the award. Because the parties did not fully brief these narrower questions, the Court does not decide them here. But certain principles may guide the lower courts’ assessment of these arguments on remand. Pp. 14–20.
(1) Section 78u(d)(5) provides limited guidance as to whether the practice of depositing a defendant’s gains with the Treasury satisfies its command that any remedy be “appropriate or necessary for the benefit of investors,” and the equitable nature of the profits remedy gen erally requires the SEC to return a defendant’s gains to wronged investors. The parties, however, do not identify a specific order in this case directing any proceeds to the Treasury. If one is entered on remand, the lower courts may evaluate in the first instance whether that order would be for the benefit of investors and consistent with equitable principles. Pp. 14–17.
(2) Imposing disgorgement liability on a wrongdoer for benefits that accrue to his affiliates through joint-and-several liability runs against the rule in favor of holding defendants individually liable. See Belknap v. Schild, 161 U. S. 10, 25–26. The common law did, however, permit liability for partners engaged in concerted wrongdoing. See, e.g., Ambler, 20 Wall., at 559. On remand, the Ninth Circuit may determine whether the facts are such that petitioners can, consistent with equitable principles, be found liable for profits as partners in wrongdoing or whether individual liability is required. Pp. 17–18.
(3) Courts may not enter disgorgement awards that exceed the gains “made upon any business or investment, when both the receipts and payments are taken into the account.” Goodyear, 9 Wall., at 804. When the “entire profit of a business or undertaking” results from the wrongdoing, a defendant may be denied “inequitable deductions.” Root, 105 U. S., at 203. Accordingly, courts must deduct legitimate expenses before awarding disgorgement under §78u(d)(5). The District Court below did not ascertain whether any of petitioners’ expenses were legitimate. On remand, the lower courts should examine whether including such expenses in a profits-based remedy is consistent with the equitable principles underlying §78u(d)(5). Pp. 18–20.
754 Fed. Appx. 505, vacated and remanded.
Sotomayor, J., delivered the opinion of the Court, in which Roberts, C. J., and Ginsburg, Breyer, Alito, Kagan, Gorsuch, and Kavanaugh, JJ., joined. Thomas, J., filed a dissenting opinion.