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High Court Hears Dispute Over ‘Ill-Gotten Gains’


The U.S. Supreme Court is considering whether the Securities and Exchange Commission may force defendants accused of defrauding investors to disgorge their ill-gotten gains.

At a hearing on Tuesday, the justices appeared skeptical that the SEC exceeded its authority by obtaining a disgorgement order against a California couple for the $27 million they had raised from investors by misrepresenting the money would be used to fund a cancer-treatment center.

Charles Liu and Xin Wang argued that disgorgement was not a form of “equitable relief” that Congress has authorized the SEC to seek, citing a 2017 Supreme Court decision known as Kokesh v. SEC finding it was a penalty.

“This authority is being used by the agency to punish …their justification for it is punitive,” the couple’s attorney, Gregory Rapawy, told the court.

But the justices suggested it was not punishment for the SEC to take money from a fraudster to refund the defrauded. “Is it not an equitable principle that no one should be allowed to profit from his own wrong?” Justice Ruth Bader Ginsburg asked.

The SEC routinely invokes disgorgement as a remedy in enforcement actions, collecting more than $3.2 billion in fiscal 2019 and returning nearly $1.2 billion to harmed investors.

“If the high court finds SEC disgorgements are unauthorized [in the Liu case], it could make the agency’s enforcement actions somewhat toothless,” Quartz noted.

Liu and Wang raised their $27 million from Chinese investors under a program that allows foreign nationals to obtain visas in exchange for investing in job-creating projects in the U.S. A trial judge ordered the disgorgement after finding that they misappropriated most of the money.

In their appeal to the Supreme Court, the couple argued that disgorgement falls outside the scope of equitable relief because, as the court held in the Kokesh case, “it aims to punish violations of public law and deter others from the same.”

But the SEC said Kokesh determined that disgorgement only constitutes a penalty under the five-year statute of limitations for actions to enforce civil penalties.

(Photo by ANTHONY WALLACE/AFP via Getty Images)

appeal, Charles Liu, disgorgement, Kokesh, U.S. Securities and Exchange Commission, U.S. Supreme Court, Xin Wang


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