Supreme Court appears to back SEC’s right to disgorgement — despite legal challenge of EB-5 fraudsters who misappropriated $27 million

  • Posted on March 4, 2020 | Updated on March 5, 2020 | 5 min read

In news that will surely please investors, both conservative and liberal justices look like they will back the SEC’s power of disgorgement, despite a challenge by convicted EB-5 fraudsters, Charles Liu and Xin Wang. The couple argues that Congress never gave the SEC such authority, and that disgorgement represents punishment. The justices seem to see disgorgement as a fair remedy to return funds to victimized investors.

Charles Liu and Xin Wang were convicted of defrauding investors who thought their EB5 investment capital was being used for the development of a cancer treatment center. But the center was never built and the couple used much of the money for personal purposes. They transferred $12.9 million of the investor funds to marketing firms in China, and deposited more than $7 million into their personal accounts. Apparently, they used up all but $250,000 of the money.

They were ordered in April 2017 by a federal judge to return $27 million to victimized EB5 green card investors and to pay $8 million in civic penalties. In a 2018 appeal, the couple’s attorney argued that disgorgement was never authorized by Congress as it “falls outside the scope of equitable relief.” Traditionally, U.S. courts have viewed disgorgement as an equitable measure since much of the money is returned to victims. During that first appeal, a ninth circuit court upheld the original ruling.

On Tuesday, March 3, 2020, the Supreme Court justices seemed to be aligned with the Trump administration’s view that taking disgorgement away from the courts would hurt both victimized investors as well as the securities industry as it can be a major deterrent to fraud.

“Is it not an equitable principle that no one should be allowed to profit from his own wrong?” questioned liberal Justice Ruth Bader Ginsburg.

Conservative Justice Neil Gorsuch seemed to be of a similar mind, asking this: “Would the government have any difficulty with a rule that the money should be returned to investors where feasible?”

Though there seems to be consensus among the Supreme Court justices — regardless of their political leaning — on the appropriateness of disgorgement, they asked questions if specific instructions were necessary to ensure fair awards, and that the money collected would be returned to investors. If disgorgement, even with certain restrictions, remains a valid tool of the SEC, that would be welcome EB5 news.

In the fiscal year 2019, the SEC collected $1.5 billion in disgorgement and penalties and gave $1.2 million of that sum back to victimized investors. It seems to be fairly evident to most people that haven’t committed major securities fraud that disgorgement can help defrauded investors recover some of their money.

Read the Financial Post article

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