Supreme Court limits SEC power to obtain profits gained via fraud
The United States Supreme Court on Monday placed limits on
the Securities and Exchange Commission's (SEC) practice of forcing defendants
to surrender profits obtained through fraud as part of the agency's enforcement
of investor-protection laws in federal courts.
The court reaffirmed the agency's authority to seek
disgorgement, a part of its civil enforcement arsenal aimed at passing on funds
acquired in fraudulent schemes to the original investors.
But the 8-1 ruling, authored by liberal Justice Sonia
Sotomayor, limited the scope of what can be sought via disgorgement to no more
than the net profits of the conduct at issue. The court also decided that
disgorgement generally must go to investors.
"Today's decision allows us to continue to strip
wrongdoers of their ill-gotten gains and return money to its rightful
owners," an SEC spokesperson said.
The decision came in an appeal by a California couple,
Charles Liu and Xin Wang, of a 2016 SEC civil action brought against them in
federal court. The justices sent the case back to lower courts for certain
unresolved legal issues to be considered.
Gregory Rapawy, a lawyer for the couple, said he was pleased
the court "clarified that traditional equitable principles limit the SEC's
authority to seek an award of net profits for the benefit of victims."
The SEC had ordered the couple to disgorge almost $27m, the
amount they raised from foreign investors for a cancer treatment centre that
was never built.
The couple raised money from 50 foreign investors on the
understanding they would be able to obtain US visas. Under the EB-5 visa
programme, wealthy foreigners can access visas in exchange for investing at
least $500,000 in certain job-creating US projects.
The SEC has said that in the most recent full fiscal year it
collected $1.5bn via disgorgement and penalties and paid $1.2bn to harmed
investors. Liu and Wang had argued that Congress never gave the SEC authority
to seek disgorgement.
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