Master The Supreme Court held that the SEC may obtain disgorgement as equitable relief only to the extent of a wrongdoer's net profits and generally for the benefit of investors. with this comprehensive case brief.
Liu v. SEC is a landmark Supreme Court decision defining the scope of the Securities and Exchange Commission's ability to seek disgorgement in federal court. For decades, the SEC routinely obtained disgorgement awards measured by gross receipts and frequently paid into the U.S. Treasury when victim distribution proved impractical. After Kokesh v. SEC characterized disgorgement as a "penalty" for statute-of-limitations purposes, litigants questioned whether disgorgement was even authorized under the Exchange Act's grant of "equitable relief." Liu squarely addressed that question.
The Court preserved the SEC's disgorgement remedy but tightly cabined it within traditional equitable limits: the award must be restricted to a wrongdoer's net profits (not gross revenue), legitimate expenses must generally be deducted, joint-and-several liability is ordinarily impermissible absent concerted wrongdoing yielding undivided profits, and proceeds should be returned to victims "for the benefit of investors," rather than routed to the Treasury. Liu thus reshaped SEC enforcement practice, remedial strategy, and settlement structuring, while offering a primer on the modern use of historical equitable remedies in federal enforcement.
Liu v. SEC, 140 S. Ct. 1936 (2020)
Petitioners Charles Liu and Xin Wang (a married couple) raised roughly $27 million from Chinese investors through the EB-5 immigrant investor program to finance a purported cancer-treatment center. The private offering materials represented that nearly all investor funds would be used to build the facility, with limited amounts allocated to administrative fees. In reality, only a small fraction was spent on project-related costs; substantial sums were diverted to marketing and to large salaries for Liu and Wang, and the center was never constructed. The SEC brought a civil enforcement action alleging violations of the federal securities laws based on material misrepresentations and misuse of investor funds. The district court granted relief that included an injunction and disgorgement of almost the entire amount raised from investors, imposed jointly and severally on Liu and Wang, while refusing to deduct business expenses on the ground that the enterprise was fraudulent. The Ninth Circuit affirmed. Petitioners argued in the Supreme Court that, after Kokesh v. SEC labeled disgorgement a penalty, the SEC lacked statutory authority to obtain disgorgement under 15 U.S.C. § 78u(d)(5), which authorizes only "equitable relief."
Does 15 U.S.C. § 78u(d)(5), which authorizes the SEC to obtain "equitable relief … for the benefit of investors," permit disgorgement in civil enforcement actions, and if so, what equitable limitations constrain such relief?
Under 15 U.S.C. § 78u(d)(5), the SEC may seek equitable relief that is appropriate or necessary for the benefit of investors. Disgorgement qualifies as equitable relief if it is limited to the wrongdoer's net profits (i.e., gross receipts minus legitimate expenses), is generally not imposed on a joint-and-several basis except when defendants act in concert to obtain undivided profits, and is awarded for the benefit of investors—typically by returning funds to victims rather than depositing them in the Treasury. Equitable principles require deduction of legitimate costs and disallow turning disgorgement into a penalty.
Yes. Disgorgement can be awarded as equitable relief under § 78u(d)(5), but only to the extent of a wrongdoer's net profits and for the benefit of investors. The Court vacated and remanded for consideration of whether legitimate expenses should be deducted, whether joint-and-several liability was appropriate given the defendants' relationship and conduct, and whether the award could be structured to benefit investors.
The Court began with the text of § 78u(d)(5), which authorizes "equitable relief" for the benefit of investors, and turned to historical equity practice to determine whether disgorgement fits within that tradition. Equity courts have long awarded an accounting of profits against wrongdoers to strip ill-gotten gains, a remedy closely analogous to disgorgement. However, such equitable relief is remedial, not punitive. To remain equitable, a profits-based award must be limited to net profits—gross revenue less legitimate expenses—because requiring a defendant to pay more than net gains transforms the remedy into a penalty. Equity also traditionally required that profits be returned to victims where feasible, consistent with § 78u(d)(5)'s "for the benefit of investors" requirement. The Court emphasized that depositing disgorged funds into the Treasury, while sometimes administratively convenient, risks severing the connection to investor benefit unless distribution is impracticable. On joint-and-several liability, the Court explained that equity generally imposes liability for one's own net gains, not for the profits of others. Joint-and-several liability may be appropriate where partners or co-conspirators acted in concert as part of a common enterprise yielding undivided profits, but it is improper as a default rule that disregards individualized gains. The Court rejected categorical rules either forbidding expense deductions in fraudulent enterprises or invariably allowing joint-and-several awards; instead, lower courts must make context-specific determinations. Expenses that are sham, improper, or serve only to perpetuate a fraud may be disallowed, but expenditures that created some legitimate value may properly be deducted. Because the lower courts had ordered disgorgement based on gross receipts, imposed joint-and-several liability, and had not analyzed whether the funds would be returned to victims, the Supreme Court vacated and remanded for proceedings consistent with these equitable constraints.
Liu preserves the SEC's ability to seek disgorgement in federal court while meaningfully limiting its scope. For practitioners and students, Liu is a pivotal remedies case: it ties modern federal enforcement to traditional equitable principles, requires careful calculation of net profits, and curtails practices like routine joint-and-several liability and Treasury deposits untethered to investor restitution. It also interacts with Kokesh (limitations period) and subsequent statutory developments, shaping how courts analyze disgorgement in SEC actions and beyond. Post-Liu, litigants must build records on legitimate expenses, individual gain, and feasible victim distribution, and courts must tailor remedies to avoid punitive excess.
No. The Court confirmed that disgorgement is available as "equitable relief" under § 78u(d)(5), but only if structured like a traditional accounting of profits: limited to net profits, taking account of legitimate expenses, generally avoiding joint-and-several liability, and benefiting investors through restitution where feasible.
Legitimate expenses are bona fide costs that have value independent of the fraud and would have been incurred in a lawful enterprise (for example, genuine costs of goods or services that provided real value). Courts may disallow expenses that are merely sham, exorbitant self-payments, or that serve only to advance or conceal the scheme. If the entire enterprise is a complete sham that confers no legitimate value, courts may conclude there are effectively no legitimate expenses to deduct.
Liu rejects joint-and-several liability as a default. Equity typically requires each defendant to disgorge only the profits he or she personally obtained. Joint-and-several disgorgement may be appropriate only where defendants acted as partners in a common enterprise and obtained undivided profits that cannot reasonably be disaggregated. Courts must make a fact-specific determination rather than assume joint liability.
Generally, yes—§ 78u(d)(5) requires relief "for the benefit of investors," which favors returning funds to victims when practicable. The Court acknowledged that circumstances may make distribution infeasible; in such cases, depositing with the Treasury may occur, but courts should prioritize restitution to investors and ensure the award remains remedial, not punitive.
Kokesh held disgorgement is a "penalty" for the purpose of the five-year statute of limitations in 28 U.S.C. § 2462; it did not decide whether disgorgement was authorized as equitable relief. Liu answered that authorization question and imposed equitable limits. After Liu, Congress expressly authorized the SEC to seek disgorgement in district court and extended certain limitations periods. Many courts continue to apply Liu's net-profits and investor-benefit constraints when interpreting and implementing disgorgement, even under the newer statutory provisions.
Parties must now develop detailed records on revenue, costs, and profit allocation; expect expert testimony on legitimate expenses and individualized gains. The SEC must propose restitution plans or explain infeasibility. Settlements often specify net-profit calculations, identify allowable deductions, limit or justify joint liability, and outline distribution mechanisms to victims to satisfy the "for the benefit of investors" requirement.
Liu v. SEC recalibrated the balance between effective securities enforcement and equitable restraint. By confirming disgorgement's availability yet insisting on traditional limits—net profits, individualized liability, and restitutionary purpose—the Court preserved a key enforcement tool while curbing punitive overreach. The opinion operationalizes the textual command that relief be "equitable" and "for the benefit of investors," tying modern practice to historical remedial principles.
For law students, Liu is a capstone case at the intersection of statutory interpretation, remedies, and securities regulation. It offers a framework for analyzing profits-based relief across contexts: identify the source of authority, tie the remedy to equitable history, ensure it is remedial rather than punitive, and tailor relief to victims. Post-Liu, mastering the mechanics of calculating net profits and structuring investor restitution is essential to competent advocacy in SEC enforcement matters.
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