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U.S. Supreme Court leans toward SEC’s power to recover ill-gotten gains

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Via Reuters Finance

WASHINGTON (Reuters) – U.S. Supreme Court justices on Tuesday appeared inclined to back the Securities and Exchange Commission’s power to use federal courts to force defendants to surrender profits obtained through fraud as part of enforcement of investor-protection laws.

FILE PHOTO: The Supreme Court building exterior seen in Washington, U.S., January 21, 2020. REUTERS/Sarah Silbiger./File Photo

The nine justices heard an appeal by California couple Charles Liu and Xin Wang contesting a 2016 civil action brought against them by the SEC in federal court. They were ordered to disgorge almost $27 million, the amount they raised from foreign investors for a cancer treatment center that was never built.

Conservative and liberal justices were skeptical of the couple’s bid to strip the SEC of its disgorgement power in federal courts, although some suggested that limits should be imposed.

Disgorgement, part of the SEC’s civil enforcement arsenal, is aimed at passing on funds acquired in a fraudulent scheme to the original investors. The agency said in a court filing that in fiscal year 2019 it collected $1.5 billion in disgorgements and penalties and paid $1.2 billion to harmed investors.

President Donald Trump’s administration, defending the SEC in the case, said that depriving courts of the ability to order disgorgement would hurt defrauded investors and the securities industry.

“Most obviously, forbidding courts to order disgorgement in SEC suits would make it easier for wrongdoers to keep their ill-gotten gains, thereby reducing the deterrent effect of the current remedial scheme,” the administration said in court papers.

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Liu and Wang argued that Congress never gave the SEC authority to seek disgorgement, and that it is a form of punishment that courts cannot impose for the SEC.

On Tuesday, the justices seemed to disagree, suggesting that disgorgement is a remedy courts may order – apart from fines or damages – in the interest of fairness.

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

The justices asked questions related to whether courts need specific instructions to prevent excessive awards or to ensure that proceeds are returned to harmed investors.

Conservative Justice Neil Gorsuch asked, “Would the government have any difficulty with a rule that the money should be returned to investors where feasible?”

Liu and Wang had raised money from 50 foreign investors on the understanding that they would be able to obtain U.S. visas. Under the federal EB-5 visa program, wealthy foreigners can access visas in exchange for investing at least $500,000 in certain job-creating projects in the United States.

Liu and Wang transferred millions of dollars to their personal accounts and the center was never built, according to U.S. authorities.

The San Francisco-based 9th U.S. Circuit Court of Appeals in 2018 upheld the disgorgement finding in the case.

The Supreme Court in 2017 put time limits on the SEC’s ability to seek disgorgement, ruling unanimously that it is subject to a five-year statute of limitations.

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