Disgorgement in EB-5 Cases: Wrongdoers Should Not Profit from their Wrongs

08.13.21 | Research & Analysis

By Osvaldo Torres, Partner, Torres Law, PA & William Cornelius, Associate Attorney, Torress Law, PA

In June 2020, the U.S. Supreme Court issued a landmark securities enforcement decision when it upheld the Securities and Exchange Commission’s (“SEC”) authority to obtain disgorgement for ill-gotten gains in federal court actions. The Supreme Court’s decision is noteworthy in the context of the EB-5 Program because the underlying case that served as the basis for the appeal involved securities laws violations perpetrated by a couple that raised EB-5 funds from Chinese investors. The ruling, of course, will also apply to all future enforcement actions sought by the SEC in federal court. 

Importantly, however, the Court’s recent decision in Liu v. SECdid not address the substance of the securities laws violations themselves, which were nothing if not textbook examples of garden variety fraud that could arise in any securities offering. In fact, the Court agreed that defendants Charles C. Liu and his wife Xin Wang committed securities fraud by misappropriating funds and must pay civil penalties for that fraud. Instead, Liu v. SEC presented the Court with narrower issues of whether the SEC had the statutory authority to seek and obtain disgorgements in federal court and under which circumstances the SEC may obtain such relief. In rendering its decision, the Court upheld the SEC’s authority to seek disgorgement as equitable relief in securities laws enforcement actions but clearly reasoned that disgorgement awards must not exceed a wrongdoer’s net profits.

Consequently, the SEC recently filed in California district court asking the court to make the defendants Liu, Wang, and their associated companies pay just under $20.9 million in disgorgement plus nearly $71,000 in prejudgment interest

This article aims to discuss the historical context for SEC disgorgement awards, provide a procedural backdrop for Liu, and address the potential impact on securities laws violations in the context of the EB-5 Program.

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