Liu v. SEC. & Exch. Comm'n
The Supreme Court ruled 8-1 that the SEC can require fraud defendants to give back their ill-gotten profits as a form of 'equitable relief,' but only up to the amount of actual net profits — not necessarily every dollar raised from investors.
The decision sends a high-profile immigration-visa fraud case back to lower courts to recalculate the repayment amount, settle whether both spouses must pay jointly, and decide which business expenses should be subtracted.
How it got here: A federal district court ordered the couple to repay the full amount raised from investors with joint-and-several liability; the Ninth Circuit affirmed; the defendants asked the Supreme Court to step in and it agreed to hear the case.
The Case in Depth
What happened
Charles Liu and his wife Xin Wang raised nearly $27 million from foreign nationals who hoped to gain U.S. permanent residency by investing in a proposed cancer-treatment center. Instead of using the funds as promised, the couple spent most of the money on inflated marketing costs and salaries, diverted large sums to personal accounts and a company Wang controlled, and sent much of the money abroad. A federal court ordered them to repay the full amount raised — without subtracting any business expenses — and held them jointly responsible for the entire sum.
The question before the Court
Can the SEC force fraud defendants to give back all the money they raised from investors, even if that amount exceeds their actual profits — and does forcing them to give back any profits at all count as the "equitable relief" the law allows?
The Court's answer
Partly — the SEC can use disgorgement (forcing fraudsters to give back their gains) as a form of equitable relief, but only within the limits that equity courts historically observed. The Court held that disgorgement stays within those limits as long as it is capped at the wrongdoer's actual net profits — not gross funds raised — and the money goes to benefit investors rather than simply disappearing into a government account.
The Court declined, however, to decide whether the specific order against Liu and Wang was lawful. Three contested issues — whether proceeds must be returned directly to investors, whether it was proper to hold both spouses jointly and fully liable, and whether certain business expenses should have been deducted — were sent back to lower courts for further examination under the principles the majority laid out.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
Investors defrauded in securities schemes are more likely to see recovered money returned directly to them, since the ruling signals that disgorgement proceeds should benefit victims rather than flow to the government's general fund. Companies and individuals accused of fraud also gain some protection against being ordered to repay more than they actually pocketed, but they must still surrender all net gains from wrongdoing.
What changes now
The case returns to the Ninth Circuit, which must re-examine three issues: whether any recovered funds must go directly to the defrauded investors rather than to the government; whether both defendants can properly be held jointly and fully liable or only each for their own share of the profits; and whether legitimate expenses — such as lease payments and cancer-treatment equipment — should be subtracted from the disgorgement total. The Court's core holding that net-profits disgorgement for investors is lawful is now settled.
What this does not decide
The Court expressly did not decide whether the specific order in this case was lawful on three narrower questions: whether the SEC must return recovered funds to investors (rather than the Treasury), whether joint-and-several liability against both defendants was proper, and whether their business expenses must be deducted. Those questions await the lower courts on remand.
Concurrences and dissents
Dissent — Justice Thomas
“The history is clear: Disgorgement is not a form of relief that was available in the English Court of Chancery at the time of the founding.”Justice Thomas's core objection — that disgorgement is a modern invention, not a historical equitable remedy the statute can authorize.
Justice Thomas argued that disgorgement is not a traditional equitable remedy at all — it is a 20th-century invention with no roots in the English Court of Chancery. Because 'equitable relief' in §78u(d)(5) must refer only to remedies that equity historically recognized, disgorgement should be unavailable entirely and the judgment should be reversed outright, not vacated and remanded. He warned that the majority's decision to 'tame rather than reject' disgorgement will allow the SEC and courts to keep expanding their own power under an ill-defined label.
How the Court got there
The legal reasoning, step by step
- When a statute authorizes 'equitable relief' without defining it, the Court looks to what remedies were historically available in courts of equity — essentially the practices of the old English chancery courts inherited into American law. That is the established framework the Court applied to §78u(d)(5), the provision authorizing the SEC to seek equitable relief in civil enforcement actions.
- Consulting equity treatises and historical case law, the Court found that stripping wrongdoers of their ill-gotten profits has been a mainstay of equity for centuries — called 'accounting,' 'restitution,' or 'disgorgement' depending on the era. The label is not what matters; the underlying profits-based remedy has deep equitable roots regardless of what courts chose to call it.
- But equity courts built in guardrails to prevent profit-stripping from becoming a punishment. They generally limited awards to a wrongdoer's net profits after deducting legitimate expenses, imposed liability only on those who actually received the gains (not others through joint-and-several liability), and directed recovered funds to victims rather than keeping the money away from the wrongdoer for its own sake.
- The Court rejected the argument that its earlier decision in Kokesh v. SEC — which classified disgorgement as a 'penalty' for the 5-year statute of limitations on civil enforcement actions — meant disgorgement could never qualify as 'equitable relief.' Kokesh expressly left that separate question open, so it did not govern here.
- The Court also rejected the government's claim that Congress, by using the word 'disgorgement' in various statutes over the years, had quietly expanded the SEC's authority beyond the traditional equitable limits. When Congress cross-references an equitable remedy, it incorporates that remedy's historical limitations, not an expanded judicial version of it.
- Applying those principles to this case, the Court found that the specific disgorgement order raised three unresolved problems — potential failure to return money to investors, joint-and-several liability, and refusal to deduct any expenses — that the parties had not fully briefed. Rather than rule on each, the Court vacated the award and sent the case back for the lower courts to assess those issues against the equitable principles it had just outlined.
Doctrinal impact
Cases affected by this decision
Distinguishes Kokesh v. SEC (581 U.S. ___)
Kokesh held disgorgement is a 'penalty' only for the statute of limitations; it expressly left open whether disgorgement qualifies as equitable relief.