The Securities and Exchange Commission is bracing for a U.S. Supreme Court ruling that could eviscerate one of the agency’s most potent weapons by slashing its power to recoup billions of dollars in illegal profits from wrongdoers.
The court hears arguments Tuesday on contentions that the SEC can’t use a traditional legal tool known as “disgorgement” to collect money from someone the commission sues in federal court. Disgorgement is distinct from fines and other penalties the SEC seeks, in part because it’s geared toward reimbursing victims.
The SEC is “turning back billions of dollars to investors -- that is not small change,” said James Cox, a professor at Duke University School of Law who signed a brief backing the SEC’s ability to seek disgorgement. “This could have a big impact.”
Without the disputed power, the SEC wouldn’t have been able to use federal courts to obtain about $1.5 billion in disgorgement orders last year, according to Urska Velikonja, a professor at Georgetown University Law Center who tracks the agency’s enforcement data.
A ruling against the SEC would especially hamper the agency’s strategy for returning money from Ponzi schemes because those cases are often resolved in federal courts, Velikonja said. The case doesn’t directly affect the SEC’s ability to seek disgorgement through administrative proceedings.
The SEC says it won administrative and court disgorgement orders totaling $3.2 billion in fiscal 2019, compared with $1.1 billion in other types of penalties.
The case, which the court will decide by late June, could also raise questions about the Federal Trade Commission’s power to seek disgorgement.
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President Donald Trump’s administration and the SEC are defending the power, saying it comes from federal courts’ inherent authority and three statutes passed by Congress. Those include the 2002 Sarbanes-Oxley Act, which U.S. Solicitor General Noel Francisco said in court papers “plainly encompasses disgorgement.”
The Sarbanes-Oxley law doesn’t explicitly mention disgorgement but says judges hearing SEC enforcement actions can award “any equitable relief” they deem appropriate to protect investors. Courts have traditionally viewed disgorgement as an “equitable” measure, which means judges make awards based on fairness rather than strict legal rules.
The justices will hear an appeal by Charles Liu and Xin Wang, a California couple fighting a $27 million disgorgement order upheld by a federal appeals court. They were found to have defrauded people seeking to take advantage of a visa program for foreigners who make large U.S. investments. Liu and Wang were accused of falsely telling investors their money would be used for a cancer treatment center.