Amicus Curiae Brief — Charles C. Liu, et al., Petitioners v. Securities and Exchange Commission
Supreme Court briefDec 23, 2019
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No. 18-1501
IN THE
Supreme Court of the United States
CHARLES C. LIU and XIN WANG a/k/a LISA WANG,
v.
Petitioners,
SECURITY AND EXCHANGE COMMISSION,
Respondent.
On Writ of Certiorari to the
United States Court of Appeals
for the Ninth Circuit
BRIEF OF WASHINGTON LEGAL FOUNDATION
AS AMICUS CURIAE IN SUPPORT OF PETITIONERS
Richard A. Samp
(Counsel of Record)
Marc B. Robertson
Washington Legal Foundation
2009 Massachusetts Ave., NW
Washington, DC 20036
(202) 588-0302
rsamp@wlf.org
December 23, 2019
QUESTION PRESENTED
Whether the Securities and Exchange
Commission may seek and obtain disgorgement from a
court as “equitable relief” for a securities law violation
even though this Court has determined that such
disgorgement is a penalty.
iii
TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . v
INTERESTS OF AMICUS CURIAE . . . . . . . . . . . . 1
STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . 2
SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . 3
ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
I.
THE SECURITIES LAWS AUTHORIZE THE
SEC TO SEEK A WELL-DEFINED ARRAY OF
REMEDIES, INCLUDING PENALTIES AS
WELL AS INJUNCTIONS AND OTHER
REMEDIES TYPICALLY AVAILABLE IN
EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
II.
DISGORGEMENT IS NOT A REMEDY
TYPICALLY AVAILABLE IN EQUITY . . . . . . . . . 12
A.
Remedies Designed To Punish
Were Not Available in Equity . . . . . . 13
B.
Monetary Remedies Provided By
Courts of Equity Were Not Akin To
SEC Disgorgement . . . . . . . . . . . . . . 15
C.
Other Features Of The Securities
Laws Confirm That Congress Did
Not Endorse SEC Disgorgement As
Permissible “Equitable Relief” . . . . . 18
iv
Page
III.
FEDERAL COURTS’ INHERENT EQUITABLE
POWERS DO NOT INCLUDE AUTHORITY TO
ORDER DISGORGEMENT OF THE SORT
SOUGHT BY THE SEC . . . . . . . . . . . . . . . . . . 21
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
v
TABLE OF AUTHORITIES
Page(s)
Cases:
CalPERS v. ANZ Securities, Inc.,
137 S. Ct. 2042 (2017) . . . . . . . . . . . . . . . . . . . . . . 1
Cyan, Inc. v. Beaver County Employees Retirement
Fund, 138 S. Ct. 1061 (2018) . . . . . . . . . . . . . . . . . 1
Feltner v. Columbia Pictures Television, Inc.,
523 U.S. 340 (1998) . . . . . . . . . . . . . . . . . . . . 15, 17
Great-West Life & Annuity Ins. Co. v. Knudson,
534 U.S. 204 (2002) . . . . . . . . . . . . . . 10, 11, 12, 14
Grupo Mexicano de Desarrollo S.A. v. Alliance
Bond Fund, 527 U.S. 308 (1999) . . . . . . . . . . . . . 22
Karahalios v. Federal Employers,
489 U.S. 527 (1989) . . . . . . . . . . . . . . . . . . . . . . . 12
Kokesh v. SEC,
137 S. Ct. 1635 (2017) . . . . . . . . . . . . . . . . . passim
Livingston v. Woodworth,
56 U.S. 546 (1854) . . . . . . . . . . . . . . . . . . . . . . . . 18
Meghrig v. KFC Western, Inc.,
516 U.S. 479 (1996) . . . . . . . . . . . . . . . 8, 12, 24, 25
Mertens v. Hewitt Assocs.,
508 U.S. 248 (1993) . . . . . . . . . . 5, 9, 10, 11, 12, 13
Middlesex County Sewerage Auth. v. National
Sea Clammers Ass’n, 453 U.S. 1 (1981) . . . . . . . . 25
Mitchell v. Robert DeMario Jewelry, Inc.,
361 U.S. 288 (1960) . . . . . . . . . . . . . . . . . . . . . . . . 6
Montanile v. Bd. of Trustees,
136 S. Ct. 651 (2016) . . . . . . . . . . . . . . . . . . . 10, 12
Mowry v. Whitney,
81 U.S. 620 (1871) . . . . . . . . . . . . . . . . . . . . . . . . 18
vi
Page(s)
Porter v. Warner Holding Co.,
328 U.S. 395 (1946) . . . . . . . . . . . . . . . . . 13, 23, 24
Root v. Lake Shore and Michigan So. Ry. Co.,
105 U.S. 189 (1881) . . . . . . . . . . . . . . . . . . . . 16, 17
Sandoz, Inc. v. Amgen, Inc.,
137 S. Ct. 1664 (2017) . . . . . . . . . . . . . . . . . . . . . 12
SEC v. Cavanaugh,
445 F.3d 105 (2d Cir. 2006) . . . . . . . . . . . . . . . . . . 3
SEC v. First Jersey Securities, Inc.
101 F.3d 1450 (1996) . . . . . . . . . . . . . . . . . . . . . . 22
SEC v. Gentile,
939 F.3d 549 (3d Cir. 2019) . . . . . . . . . . . . . . . . . 14
SEC v. JT Wallenbrock & Assocs.,
440 F.3d 1109 (9th Cir. 2006) . . . . . . . . . . . . . . . 19
SEC v. Texas Gulf Sulpher Co.
446 F.2d 1301 (2d Cir. 1971) . . . . . . . . . . . . . . . . . 7
SEC v. Whitemore,
659 F.3d 1 (D.C. Cir. 2011) . . . . . . . . . . . . . . . . . . 9
Suffolk Co. v. Hayden,
70 U.S. 315 (1865) . . . . . . . . . . . . . . . . . . . . . . . . 17
Tull v. United States,
481 U.S. 412 (1987) . . . . . . . . . . . . . . . . . . . . . 4, 13
United States v, Burke,
504 U.S. 229 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Statutes
Civil Rights Act of 1964, Title VII . . . . . . . . . . . . . 11
42 U.S.C. § 2000e-5(g) . . . . . . . . . . . . . . . . . 11
vii
Page(s)
Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, Pub. L. 111-203 . . . . . . . 20
Emergency Price Control Act (EPCA) . . . . . . . 23, 24
Employee Retirement Income Security Act of 1974
(ERISA), 29 U.S.C. § 1001, et seq. . . . . . . . . 5, 9, 12
29 U.S.C. § 1132(a) . . . . . . . . . . . . . . . . . . 9, 10
29 U.S.C. § 1132(a)(3) . . . . . . . . . . . . . . . . . . 10
Insider Trading Sanctions Act of 1984,
Pub. L. 98-376 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Judiciary Act of 1789 § 1, 1 Stat. 78 . . . . . . . . . . . . 22
Resource Conservation and Recovery Act (RCRA),
Pub. L. 94-580 . . . . . . . . . . . . . . . . . . . . . . . . . 8, 25
Sarbanes-Oxley Act of 2002, Pub. L. 107-204 . . . . . 8
§ 305, 15 U.S.C. § 78u(d)(5) . . . . . . . . . . . . . . 8
Securities Act of 1933,
15 U.S.C. § 77a, et seq. . . . . . . . . . . . . . . . . . . . 6, 12
15 U.S.C. § 77h-1(e) . . . . . . . . . . . . . . . . . 8, 20
15 U.S.C. § 77q(a)(2) . . . . . . . . . . . . . . . . . . . . 2
15 U.S.C. § 77t(b) . . . . . . . . . . . . . . . . . . . . . . 8
15 U.S.C. § 77t(d) . . . . . . . . . . . . . . . . . 3, 8, 19
15 U.S.C. § 77t(d)(3)(B)(iii) . . . . . . . . . . 19, 20
Securities Enforcement Remedies and Penny
Stock Reform Act of 1990, Pub. L. 101-429 . . . . . . 7
viii
Page(s)
Securities Exchange Act of 1934,
15 U.S.C. § 78a, et seq. . . . . . . . . . . . . . . . . . . . 6, 12
15 U.S.C. § 78u(d)(3) . . . . . . . . . . . . . . . . 8, 19
15 U.S.C. § 78u(d)(5) . . . . . . . . . . 4, 5, 8, 9, 11
12, 13, 21
15 U.S.C. § 78u-1(a)(2) . . . . . . . . . . . . . . . 7, 20
15 U.S.C. § 78u-2(e) . . . . . . . . . . . . . . . . . . . . 8
15 U.S.C. § 78aa . . . . . . . . . . . . . . . . . . . . . . . 7
7 U.S.C. § 13a-1(d)(3)(B) . . . . . . . . . . . . . . . . . . . . . 21
12 U.S.C. § 5565(a)(1), (a)(2)(D) . . . . . . . . . . . . . . . 21
Miscellaneous:
Stephen M. Bainbridge, Kokesh Footnote
Three Notwithstanding: The Future of the
Disgorgement Penalty in SEC Cases,
56 Wash. U. J.L. & Pol’y 17 (2018) . . . . . . . . . . . 14
Francesco A. DeLuca, Sheathing Restitution’s
Dagger Under the Securities Acts: Why
Federal Courts Are Powerless to Order
Disgorgement in SEC Enforcement Proceedings,
33 Rev. Banking & Fin. L. 899 (2014) . . . . . . . . . 23
Russell G. Ryan, The Equity Facade of SEC Disgorgement, 4 Harv. Bus. L. Rev. Online 1 (Nov.
2013), http://www.hblr.org/2013/11/the-equityfacade-of-sec-disgorgement/ . . . . . . . . . . . . . . . . . 12
INTERESTS OF AMICUS CURIAE
The Washington Legal Foundation (WLF) is a
public-interest law firm and policy center with
supporters in all 50 States.1 WLF promotes and
defends free enterprise, individual rights, a limited and
accountable government, and the rule of law.
To that end, WLF has regularly appeared before
this and other federal courts in cases related to the
proper scope of the federal securities laws. See, e.g.,
Cyan, Inc. v. Beaver County Employees Retirement
Fund, 138 S. Ct. 1061 (2018); CalPERS v. ANZ
Securities, Inc., 137 S. Ct. 2042 (2017). In particular,
WLF has filed amicus curiae briefs urging that the
enforcement powers of the Securities and Exchange
Commission (SEC) and other federal regulatory
agencies be limited to those expressly granted by
Congress. See, e.g., Kokesh v. SEC, 137 S. Ct. 1635
(2017).
The SEC routinely urges federal courts to impose
a disgorgement sanction on those alleged to have
violated federal securities laws, despite the absence of
any express statutory authorization for such relief.
WLF is concerned that such efforts undermine the
constitutionally mandated separation of powers.
Federal regulatory agency possess only those powers
granted to them by Congress. When, as here, statutes
are silent regarding the grant of a power to an agency,
1
Pursuant to Supreme Court Rule 37.6, WLF states that
no counsel for a party authored this brief in whole or in part; and
that no person or entity, other than WLF and its counsel, made a
monetary contribution intended to fund the preparation and
submission of this brief. All parties have consented to the filing.
2
Congress should be understood to have denied that
power.
Congress has supplied the SEC with many tools
with which to ensure compliance with the securities
laws. The SEC should rely on those tools rather than
resorting to the non-statutory enforcement mechanisms
it apparently finds more convenient.
STATEMENT OF THE CASE
Petitioners Charles C. Liu and Xin Wang raised
$27 million from investors, ostensibly for the purpose
of constructing and operating a proton cancer therapy
center in California. In 2016, the SEC filed a civil
action against Liu and Wang, alleging three counts of
securities fraud.
The district court granted summary judgment to
the SEC on its claim that Liu and Wang violated
Section 17(a)(2) of the Securities Act of 1933, 15 U.S.C.
§ 77q(a)(2), which prohibits obtaining money or
property through untrue statements or omissions in
the offer or sale of securities. Pet. App. 9a-64a. The
court stated that because “that violation is sufficient to
trigger imposition of the remedies the SEC seeks,” it
did not need to consider the SEC’s remaining claims.
Id. at 34a.
The court granted each of the remedies
requested by the SEC. It permanently enjoined Liu
and Wang from violating § 77q(a)(2) and from offering
to sell securities in connection with the U.S.
government’s EB-5 visa program. Pet. App. 62a-63a.
It held that civil penalties should be imposed under the
3
steepest tier authorized by statute, 15 U.S.C. § 77t(d);
it imposed a $6.7 million penalty on Liu and a $1.5
million penalty on Wang. Id. at 42a, 62a. And the
court ordered that Liu and Wang were jointly and
severally liable for disgorgement of $26.7
million—calculated based on $27 million obtained from
investors minus funds already recovered by the SEC
from Liu’s and Wang’s corporate accounts. Id. at 40a41a, 62a.
Liu and Wang challenged the disgorgement
judgment on appeal. In particular, they argued that
the district court “lacked statutory authority to award
disgorgement,” citing this Court’s Kokesh decision
(which came down two months after the district court
issued its judgment). Pet. 9th Cir. Br. 48-49. The
Ninth Circuit expressly acknowledged that Liu and
Wang were raising that argument. Pet. App. 6a
(stating that, “[r]elying on Kokesh, ... the Appellants
argue that the district court lacked the power to order
disgorgement”).
The appeals court nonetheless
affirmed the disgorgement award, concluding that
Kokesh was not “clearly irreconcilable” with
longstanding Ninth Circuit precedent that upheld the
SEC’s statutory authority to seek (and the federal
court’s authority to award) disgorgement as a remedy
for securities law violations. Id. at 7a.
SUMMARY OF ARGUMENT
Federal appeals courts that have upheld
disgorgement as a remedy for securities law violations
have done so with the understanding that
disgorgement of ill-gotten gains is an “equitable”
remedy. See, e.g., SEC v. Cavanaugh, 445 F.3d 105,
4
117 (2d Cir. 2006). Based on that understanding,
appeals courts have concluded that the SEC possesses
statutory authority to seek disgorgement2 and that
federal courts may impose a disgorgement remedy
pursuant to their inherent equitable powers.
But Kokesh undermines that basic understanding. Kokesh determined that “SEC disgorgement
constitutes a penalty.”
137 S. Ct. at 1643.
Penalties—that is, remedies intended to punish
culpable individuals—have long been understood to be
legal remedies issued by courts of law, not equitable
remedies. Tull v. United States, 481 U.S. 412, 422
(1987).
Federal law authorizes the SEC to seek three
categories of remedies in civil enforcement actions
against those accused of violating the securities laws:
injunctions, monetary penalties, and “any equitable
relief that may be appropriate or necessary for the
benefit of investors.”
15 U.S.C. § 78u(d)(5).
Disgorgement is not a form of injunctive relief. Nor
does the SEC assert that it sought disgorgement from
Liu and Wang under its statutory authority to seek
civil penalties; indeed, the judgment includes a
separate penalty award. So the only possible statutory
justification for disgorgement (and the one on which
the SEC has relied in the past) is that the award
constitutes equitable relief.
2
See 15 U.S.C.§ 78u(d)(5) (“In any action or proceeding
brought or instituted by the Commission under any provision of
the securities law, the Commission may seek, and any Federal
court may grant, any equitable relief that may be appropriate or
necessary for the benefit of investors.”).
5
But there is no reason to conclude that Congress,
when it authorized “any equitable relief,” intended to
authorize relief (such as disgorgement) that historically
has never been considered equitable in nature. The
Court has construed provisions in other federal
statutes that expressly authorize “equitable relief” as
“refer[ring] to those categories of relief that were
typically available in equity (such as injunction,
mandamus, and restitution, but not compensatory
damages).” Mertens v. Hewitt Assocs., 508 U.S. 248,
256 (1993) (construing ERISA provision authorizing
suits for “appropriate equitable relief”) (emphasis in
original). In the absence of evidence that disgorgement
of the sort sought by the SEC was ever available in
equity, one cannot plausibly interpret “any equitable
relief,” as used in § 78u(d)(5), to encompass
disgorgement.
The lower courts ordered disgorgement to
achieve what they believed would be an appropriate
and just outcome: it would be “unjust” not to require
wrongdoers to disgorge all the funds they obtained by
means of fraud. Pet. App. 7a, 41a. But that rationale
effectively writes the word “equitable” out of § 78u(d)(5)
and authorizes the award of any relief a court deems
“appropriate.” As Mertens explained, it would “deprive
of all meaning the distinction Congress drew” between
equitable relief and other forms of relief. 508 U.S. at
258 & n.8 (stating that “‘[e]quitable’ relief must mean
something less than all relief”) (emphasis in original)).
Nor may the SEC justify the disgorgement
remedy as an exercise of the inherent powers of the
federal courts. SEC Opp. Br. 5 (asserting that
disgorgement orders are authorized “because, ‘[w]hen
6
Congress entrusts to an equity court the enforcement
of prohibitions contained in a regulatory enactment, it
must be taken to have acted cognizant of the historic
powers of equity to provide complete relief’”) (quoting
Mitchell v. Robert DeMario Jewelry, Inc., 361 U.S. 288,
291-92 (1960)). Whatever inherent equitable powers a
federal court may possess are limited to the award of
equitable remedies and, as Kokesh makes clear, SEC
disgorgement remedies are not equitable in nature.
ARGUMENT
I.
THE SECURITIES LAWS AUTHORIZE THE SEC
TO SEEK A WELL-DEFINED ARRAY OF
REMEDIES, INCLUDING PENALTIES AS WELL AS
I NJUNCTIONS A ND O T H ER R EMEDIES
TYPICALLY AVAILABLE IN EQUITY
In the wake of the 1929 stock market crash and
the Great Depression, Congress adopted a series of
statutes—including the Securities Act and the
Securities Exchange Act of 1934—that imposed
extensive federal controls on the securities industry.
Initially, “the only statutory remedy available to
the SEC in an enforcement action was an injunction
barring future violations of federal law.” Kokesh, 137
S. Ct. at 1640. The SEC eventually concluded that the
absence of monetary remedies hampered its ability to
ensure compliance with the law, and it began
requesting courts “to order disgorgement as an exercise
of their inherent equity power to grant relief ancillary
to an injunction.” Ibid (citations omitted). The Second
Circuit endorsed monetary awards for the first time in
1971, but it made clear that such awards were
7
authorized only for the purpose of providing restitution
to victims of stock fraud, not to punish wrongdoers:
There is little doubt that § 27 of the
[Securities Exchange] Act [15 U.S.C.
§ 78aa] confers general equity powers on
the district courts. ... [W]e hold that the
SEC may seek other than injunctive relief
in order to effectuate the purposes of the
Act, so long as such relief is remedial
relief and is not a penalty assessment.
SEC v. Texas Gulf Sulpher Co., 446 F.2d 1301, 1307-08
(2d Cir. 1971) (emphasis added).
In the ensuing years, Congress increased the
remedies available to the SEC so that the Commission
now has available a comprehensive set of enforcement
tools. The Insider Trading Sanctions Act of 1984, Pub.
L. 98-376, authorizes the SEC to file an enforcement
action against any person who bought or sold a security
while in possession of material nonpublic information
and to seek a penalty of up to “three times the profit
gained or loss avoided.” 15 U.S.C. § 78u-1(a)(2).3
In 1990, as part of the Securities Enforcement
Remedies and Penny Stock Reform Act, Congress
authorized the SEC to seek monetary civil penalties for
3
Congress’s decision to adopt a penalty provision was
motivated by two concerns. First, in insider trading cases it can be
exceedingly difficult to identify a victim to whom to award
restitution. Second, many believed that a penalty multiplier was
warranted because simply requiring an inside trader to give up his
profits if caught would not sufficiently deter future violations.
8
virtually all securities-law violations. 15 U.S.C.
§§ 77t(d) & 78u(d)(3). That statute also authorized the
SEC to seek disgorgement of ill-gotten gains in
connection with administrative enforcement
proceedings. 15 U.S.C. §§ 77h-1(e) & 78u-2(e).
Finally, § 305(b) of Sarbanes-Oxley Act of 2002
(codified at 15 U.S.C. § 78u(d)(5)) authorized the SEC
in civil enforcement actions to seek, and federal courts
to grant, “any equitable relief that may be appropriate
or necessary for the benefit of investors.” The Court
has recognized that these amendments “left the
Commission with a full panoply of enforcement tools.”
Kokesh, 137 S. Ct. at 1640.
But an express
authorization to seek disgorgement of ill-gotten gains
in civil actions is not among those tools.
The SEC does not assert that its statutory
authority to seek civil penalties, 15 U.S.C. §§ 77t(d) &
78u(d)(3), justifies the disgorgement ordered in this
case. Indeed, the judgment includes a separate award
of penalties totaling $8.2 million. Nor can the SEC
plausibly contend that the disgorgement award
qualifies as a statutorily authorized injunction.4 So
4
Section 77t(b) authorizes the SEC to bring an action “to
enjoin [securities law violations], and upon a proper showing, a
permanent or temporary injunction or restraining order shall be
granted without bond.” A judgment ordering disgorgement does
not “enjoin” anything; rather, it requires defendants to pay a sum
of money out of their assets. See Meghrig v. KFC Western, Inc.,
516 U.S. 479, 484 (1996) (statute authorizing actions to “restrain”
violations of the Resource Conservation and Recovery Act (RCRA)
does not authorize an action seeking compensation for
environmental cleanup costs from a party responsible for RCRA
violations).
9
the only possible statutory justification for
disgorgement (and the one on which the SEC has
principally relied in the past) is § 78u(d)(5), which
authorizes civil enforcement actions for “any equitable
relief that may be appropriate or necessary for the
benefit of investors.”5
The word “equitable” limits the SEC’s civil
enforcement authority. The statute does not authorize
the SEC to seek just any relief that it deems
appropriate or necessary; rather, the relief sought must
be “equitable” in nature. Moreover, the phrase
“equitable relief” has a well-understood meaning: it
refers to relief traditionally granted by courts of equity
before the merger of courts of law and equity in 1938.
In other words, § 78u(d)(5) authorizes SEC disgorgement actions only if such disgorgement awards were
traditionally granted by courts of equity.
When Congress has used the term “equitable
relief” in other federal statutes, it has been understood
to have intended the meaning outlined above. For
example, the Employee Retirement Income Security
Act of 1974 (ERISA) authorizes aggrieved parties to file
suit “to enjoin” proscribed conduct or “to obtain other
appropriate equitable relief.” 29 U.S.C. § 1132(a). The
Court held that the statutory phrase “equitable relief”
“refers to those categories of relief that were typically
available in equity (such as injunction, mandamus, and
restitution, but not compensatory damages).” Mertens,
5
Following § 78u(d)(5)’s enactment, the SEC began citing
the statute as authority for seeking disgorgement. See, e.g., SEC
v. Whitemore, 659 F.3d 1, 4 (D.C. Cir. 2011).
10
508 U.S. at 256. Confirming that construction a decade
later, the Court stated:
As we explained in Mertens, “‘equitable’
relief must mean something less than all
relief.” 508 U.S., at 258, n.8. Thus, in
Mertens we rejected a reading of the
statute that would extend the relief
obtainable under [§ 1132(a)] to whatever
relief a court of equity is empowered to
provide in the particular case at issue
(which could include legal remedies that
would otherwise be beyond the scope of
the equity court’s authority). Such a
reading, we said, would “limit the relief
not at all” and “render the modifier
[‘equitable’] superfluous.” Id. at 257-58.
Instead, we held that the term “equitable
relief” in [§ 1132(a)(3)] must refer to
“those categories of relief that were
typically available in equity .... .” Id. at
256.
Great-West Life & Annuity Ins. Co. v. Knudson, 534
U.S. 204, 209-10 (2002).6 Accord, Montanile v. Bd. of
6
Dissenting justices argued that because the distinction
between courts of law and courts of equity is of limited modern
relevance, Congress’s use of the phrase “equitable relief” should
not be understood to have incorporated that distinction. The Court
rejected that argument:
It is easy to disparage the law-equity dichotomy as
“an ancient classification,” post, at 720 (opinion of
GINSBURG, J.), and an “obsolete distinctio[n],”
post, at 719 (opinion of STEVENS, J.). Like it or
11
Trustees, 136 S. Ct. 651, 657 (2016).
The Court adopted a similar construction of
“equitable relief” as used in Title VII of the Civil Rights
Act of 1964. As originally enacted in 1964, Title VII
stated that if an employer is found to have engaged in
unlawful discrimination, a federal court is authorized,
inter alia, to issue “any other equitable relief as the
court deems appropriate.” 42 U.S.C. § 2000e-5(g)
(1990).
The Court held that § 2000e-5(g)’s
authorization of “equitable relief” precluded awards for
compensatory or punitive damages. United States v.
Burke, 504 U.S. 229, 238 (1992).
The timing of § 78u(d)(5)’s adoption lends further
support to our proposed interpretation of the statute.
Congress adopted § 78u(d)(5) as part of the SarbanesOxley Act in 2002, after Mertens and only several
months after the Court issued its Great-West decision.
To the extent that existing court decisions are relevant
to discerning congressional intent—and the SEC
argues they should be—Mertens and Great-West
suggest that Congress was aware of judicial
constructions of the phrase “equitable relief” and
inserted the word “equitable” into § 78u(d)(5) to limit
not, however, that classification and distinction
has been specified by the stature; and there is no
way to give the specification meaning—indeed,
there is no way to render the unmistakable
limitation of the statute a limitation at all—except
by adverting to the differences between law and
equity to which the statute refers.
Id. at 217.
12
the scope of the “relief” it was authorizing. See Russell
G. Ryan, The Equity Facade of SEC Disgorgement, 4
Harv. Bus. L. Rev. Online 1, 4 (Nov. 2013),
http://www.hblr.org/2013/11/the-equity-facade-of-secdisgorgement/.
Finally, the SEC should not be heard to argue
that, quite apart from the statutory provisions cited
above, the securities laws impliedly grant the
Commission authority to seek disgorgement. The
Securities Act and the Securities Exchange Act grant
the SEC “a full panoply of enforcement tools.” Kokesh,
137 S. Ct. at 1640. The Court has repeatedly held that
“[w]here, as here, ‘a statute expressly provides a
remedy, courts must be especially reluctant to provide
additional remedies.’” Sandoz, Inc. v. Amgen, Inc., 137
S. Ct. 1664, 1675 (2017) (quoting Karahalios v. Federal
Employees, 489 U.S. 527, 533 (1989)). Accord, Meghrig,
516 U.S. at 488; Great-West, 534 U.S. at 209 (given
ERISA’s “comprehensive” nature, Court expresses
“especial[ ] reluctan[ce] to tamper with the enforcement
scheme embodied in the statute by extending remedies
not specifically authorized in its text”).
In sum, the only possible statutory justification
for disgorgement is § 78u(d)(5), and that statute
authorizes only “equitable relief”—that is, forms of
relief typically granted by courts of equity. As
explained below, disgorgement does not fit within that
definition of “equitable relief.”
II.
DISGORGEMENT IS NOT A REMEDY TYPICALLY
AVAILABLE IN EQUITY
Citing Mertens, the Court explained in Montanile
13
that a statutory term authorizing “equitable relief” “is
limited to those categories of relief that were typically
available during the days of the divided bench
(meaning, the period before 1938 when courts of law
were separate).” 136 S. Ct. at 657. There is absolutely
no evidence that pre-1938 equity courts “typically”
granted relief akin to the disgorgement remedies
routinely sought by the SEC. In the absence of such
evidence, § 78u(d)(5) provides no support for the
judgment below.
A.
Remedies Designed To Punish Were
Not Available in Equity
Mertens listed three categories of relief that were
“typically” available in equity: injunction, mandamus,
and restitution. 508 U.S. at 256. Restitution is
generally an equitable form of relief because it
generally “is limited to ‘restoring the status quo and
ordering the return of that which rightfully belongs to
the purchaser or tenant.’” Tull, 481 U.S. at 424
(quoting Porter v. Warner Holding Co., 328 U.S. 395,
402 (1946)). But SEC disgorgement does not qualify as
restitution because it is not imposed for the purpose of
restoring property to stock-fraud victims property that
“rightfully belongs” to them. Rather, as Kokesh
recognized, SEC disgorgement is imposed to penalize
wrongdoers and to deter misconduct. 137 S. Ct. at
1643-45. Disgorgement orders “go beyond compensation, are intended to punish, and label defendants
wrongdoers.” Id. at 1645. Tull held that such remedies
do not constitute equitable relief available from courts
of equity: “A civil penalty was a type of remedy at
common law that could only be enforced in courts of
law. Remedies intended to punish culpable individuals,
14
as opposed to those intended simply to extract
compensation or restore the status quo, were issued by
courts of law, not courts of equity.” 481 U.S. at 422.7
A Third Circuit opinion issued this fall provides
a thoughtful analysis of Kokesh’s impact on the SEC’s
remedial powers. SEC v. Gentile, 939 F.3d 549 (3d Cir.
2019). Although noting that the Court “was careful to
reserve the issue,” the appeals court detected in Kokesh
“skepticism that SEC disgorgement is applied in
conformity with traditional equitable principles.” Id. at
562-63 (citing Kokesh, 137 S. Ct. at 1640, 1644). The
appeals court also expressed skepticism of its own,
stating that “[c]ourts of equity do not award as
incidental relief damages penal in character without
express statutory authority” and that “SEC
disgorgement is not authorized by statute” and “lacks
any textual basis.” Id. at 562. Legal scholars have
expressed similar skepticism. See, e.g., Stephen M.
Bainbridge, Kokesh Footnote Three Notwithstanding:
The Future of the Disgorgement Penalty in SEC Cases,
56 Wash. U. J.L. & Pol’y 17 (2018).
7
Indeed, even restitution sometimes does not qualify as
equitable relief. “[F]or restitution to lie in equity, the action
generally must seek not to impose personal liability on the
defendant, but to restore to the plaintiff particular funds or
property in the defendant’s possession.” Great-West, 534 U.S. at
214 (emphasis added), A plaintiff whose property has wrongfully
fallen into the defendant’s hands is not entitled to equitable relief
if the property (or its proceeds) is no longer in the defendant’s
possession; rather, the plaintiff’s only remedy is a claim at law for
damages. Id. at 213-16. Importantly, the SEC does not contend
that the funds it seeks to disgorge from Liu and Wang are still in
their possession.
15
B.
Monetary Remedies Provided By
Courts of Equity Were Not Akin To
SEC Disgorgement
In past disgorgement proceedings, the SEC has
cited stray comments by this Court from the small
handful of cases in which the Court has used the word
“disgorgement.” For example, in the course of ruling
that a copyright-infringement claim stated an action at
law and thus was triable by a jury, the Court stated
that it has occasionally “characterized as equitable”
claims for monetary relief, “such as actions for
disgorgement of improper profits.” Feltner v. Columbia
Pictures Television, Inc., 523 U.S. 340, 352 (1998).
That citation is misleading because the Feltner
dicta refers to a “disgorgement” remedy quite unlike
SEC disgorgement. In some instances, equity courts
awarded restitution (very occasionally referred to as
“disgorgement”) to plaintiffs in copyright and patent
cases. Equity courts deemed it fair in such cases to
order a defendant found to have infringed another’s
patent or copyright to pay the profits generated by his
infringement to the injured plaintiff, who was deemed
the rightful owner of those profits. As Kokesh notes,
SEC disgorgement orders lack a similar restitutionary
basis.
Throughout American legal history, whether a
remedy was classified as legal or equitable had
particular significance in the fields of patent and
copyright law. Before the merger of law and equity in
the 20th century, patentees and copyright owners faced
a difficult choice in deciding whether to proceed against
infringers at law or in equity. If they were most
16
interested in enjoining future infringement, they would
proceed in equity because injunctive relief was
available only in equity, not in courts of law. But
throughout most of the 19th century (until 1870 in the
case of patents, 1909 in the case of copyrights),
damages were unavailable in equitable actions filed
against infringers; so a second lawsuit was required to
recover damages for past infringement. See Root v.
Lake Shore and Michigan So. Ry. Co., 105 U.S. 189,
201 (1881).
Federal courts were sympathetic to this dilemma
and thus permitted plaintiffs proceeding in equity to
seek “equitable” monetary remedies (referred to as an
“accounting”) in addition to injunctive relief. The
courts permitted patentees and copyright owners to
recover in equity the net profit that the defendant
earned as a result of his infringement, as a substitute
for the damages they might have been awarded in an
action at law. In an 1881 patent-law decision, this
Court explained that once a federal court acquired
jurisdiction to consider a grant of injunctive relief, it
could “retain the cause for the sake of administering
an entire remedy and complete justice, rather than
send him to a court of law for redress in a second
action.” Root, 105 U.S. at 214. The Court elaborated:
The rule adopted was that which the
court in fact applies in cases of trustees
who have committed breaches of trust by
an unlawful use of trust property for their
own advantage; that is, to require them to
refund the amount of profit which they
have actually realized. This rule was
adopted, not for the purpose of acquiring
17
jurisdiction, but, in cases where, having
jurisdiction to grant equitable relief, the
court was not permitted by the principles
and practice in equity to award damages
in the sense in which the law gives them,
but a substitute for damages, for the
purpose of preventing multiplicity of
suits.
Id. at 214-15.
Feltner was a copyright case. The “disgorgement”
relief referenced in that decision is the relief described
in Root: a restitution award in equity to a patentee or
copyright holder (consisting of the profits earned by the
defendant as a result of his infringement) in lieu of the
damages he might have recovered in an action at law.8
That disgorgement relief is far afield from the
8
Nineteenth century courts recognized a rough
equivalence between the equitable monetary remedy (an award of
the net profit earned by the defendant as a result of his
infringement) and damages at law (awarded for losses suffered by
the patentee or copyright holder as a result of the infringement).
Indeed, in actions at law, this Court routinely recognized that the
amount of the infringer’s unjust profit could properly be used as
evidence of the plaintiff’s lost profits. See, e.g., Suffolk Co. v.
Hayden, 70 U.S. 315, 320 (1865) (“And what evidence could be
more appropriate and pertinent [in assessing damages] than that
of the utility and advantage of invention over the old modes or
devices that had been used for working out similar results? With
a knowledge of these benefits to the persons who have used the
invention, and the extent of the use by the infringer, a jury will be
in possession of material and controlling facts that may enable
them, in the exercise of a sound judgment, to ascertain the
damages, or in other words, the losses to the patentee or owner by
the piracy instead of the purchase of the use of the invention.”).
18
disgorgement SEC seeks, which would disgorge profits
from a wrongdoer not for the purpose of compensating
an injured plaintiff but for the purpose of ensuring that
the defendant is not “unjustly enriched” by his
wrongdoing. Historically, courts in equity did not
recognize the relief SEC seeks.
The stark contrast between the equitable relief
recognized by 19th-century equity courts and the
disgorgement relief SEC seeks is all the greater given
SEC’s refusal to limit disgorgement to a wrongdoer’s
net profits.
Nineteenth-century equity courts
consistently refused to grant monetary relief that
exceeded the infringer’s net profits derived directly
from the infringement, even when the plaintiff
presented evidence that his losses far exceeded those
net profits or that the defendant could have earned
much more from his infringement if he had operated
his business more efficiently. See, e.g., Livingston v.
Woodworth, 56 U.S. 546, 560 (1854) (injured claimants
are entitled to claim the defendant’s net profits derived
from the infringement, “that which ... is theirs, and
nothing beyond this”); Mowry v. Whitney, 81 U.S. 620,
650 (1871).
C.
Other Features Of The Securities
Laws Confirm That Congress Did Not
Endorse SEC Disgorgement As
Permissible “Equitable Relief”
In responding to Liu’s and Wang’s challenge to
disgorgement, the Ninth Circuit did not point to any
statutory authority for SEC disgorgement actions.
Rather, it simply noted Ninth Circuit precedent that
19
endorsed SEC disgorgement9 and added that it would
be “unjust” not to order wrongdoers to cough up every
dollar they received from defrauded investors. Pet.
App. 7a.
The Ninth Circuit’s failure to cite statutory
provisions authorizing SEC disgorgement is
unsurprising; there are none. Moreover, various
statutory provisions provide evidence that Congress
affirmatively opposed granting the SEC such authority.
Foremost among these are 15 U.S.C. § 77t(d) &
78u(d)(3), which authorize the SEC to seek severe
penalties against wrongdoers. For the most severe
violations (those involving “fraud, deceit, manipulation,
or deliberate or reckless disregard of a regulatory
requirement” and which “resulted in substantial loss”),
the SEC is authorized to seek a penalty equal to “the
gross amount of pecuniary gain.” § 77t(d)(3)(B)(iii).
Although the district judge imposed a § 77t(d) penalty
on Liu and Wang of only $8.2 million (choosing instead
to label most of the penalty he imposed as
“disgorgement”), a $26.7 million penalty would have
been permissible under § 77t(d)(3)(B)(iii)’s “gross
amount of pecuniary gain” provision.10 Given that
Congress has expressly authorized a penalty remedy
9
SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1114
(9th Cir. 2006).
10
The SEC agrees. See SEC 9th Cir. Br. at 49 (“The
district court acted within its discretion when it imposed penalties
totaling less than a third of the disgorgement amount, even though
it would have been well within its discretion in setting the civil
penalty equal to the disgorgement amount.”).
20
capable of ensuring that wrongdoers will be deprived of
ill-gotten gains, there is little reason to conclude that
Congress also authorized the SEC to double that
penalty by seeking disgorgement as a form of
“equitable relief.”
Congress has expressly authorized a penalty
multiplier for one specific category of securities-law
violators: inside traders. Since 1984, securities law has
authorized the SEC to seek penalties of “three times
the profit gained or loss avoided” by inside traders. 15
U.S.C. § 78u-1(a)(2). That treble-damages provision
strongly suggests that Congress did not authorize the
SEC to use a disgorgement remedy as a method of (as
here) increasing penalties on other violators to more
than 100% of the “gross amount of pecuniary gain.”
Indeed, there would have been little reason for
Congress to impose caps on the penalties awardable
under § 77t(d)(3)(B)(iii)—with lower caps applying to
less serious violators— if SEC were free to circumvent
those caps by seeking additional, massive penalties in
the form of disgorgement.
Congress demonstrated its awareness of the
disgorgement remedy by expressly authorizing it in
some settings but not in civil actions filed by the SEC.
For example, federal law permits the SEC to seek
disgorgement in administrative proceedings. 15 U.S.C.
§ 77h-1(e) (“In any cease-and-desist proceeding ..., the
Commission may enter an order requiring accounting
and disgorgement.”). The Dodd-Frank Act granted new
powers to the SEC in 2010 but did not grant the
Commission disgorgement authority—yet it
simultaneously granted disgorgement authority to two
other federal enforcement agencies (the CFTC and the
21
CFPB). See 7 U.S.C. § 13a-1(d)(3)(B) (CFTC disgorgement authority); 12 U.S.C. § 5565(a)(1), (a)(2)(D)
(CFPB). Had Congress intended to authorize the SEC
to seek a disgorgement remedy in civil actions, one
would reasonably expect that it would have done so in
the same manner that it used to create other
disgorgement remedies: by saying so expressly.
Finally, 15 U.S.C. § 78u(d)(5) imposes an
important limitation on any “equitable relief” that the
SEC may seek in a civil action: the relief must be
“appropriate or necessary for the benefit of investors.”
As Kokesh made clear, the SEC disgorgement remedy
is designed to penalize wrongdoers and to deter
wrongdoing by others, and only incidentally to benefit
the investors harmed by the wrongdoers. While the
general population of investors arguably benefits when
securities fraud is deterred, that generalized benefit is
unlikely what Congress had in mind when it specified
that any “equitable relief” must be “for the benefit of
investors.” A much more plausible interpretation is
that § 78u(d)(5) expressly endorses a well-recognized
form of equitable relief: recoupment of property lost by
investors who were defrauded by the defendant.
III.
FEDERAL COURTS’ INHERENT EQUITABLE
POWERS DO NOT INCLUDE AUTHORITY TO
ORDER DISGORGEMENT OF THE SORT SOUGHT
BY THE SEC
Nor may the SEC justify the disgorgement
remedy as an exercise of the inherent powers of the
federal courts.
Having provided the SEC with
extensive, detailed enforcement powers, it is doubtful
that Congress would grant the federal courts “inherent
22
powers” to award the SEC additional relief not
specified in the securities laws. But whatever inherent
equitable powers a federal may possess are limited to
the award of equitable remedies and, as Kokesh makes
clear, SEC disgorgement remedies are not equitable in
nature.
The Judiciary Act of 1789 conferred on the
federal courts jurisdiction over “all suits ... in equity.”
§ 1, 1 Stat. 78. The Court has interpreted that
jurisdictional provision as authorizing federal courts to
grant equitable remedies of the sort traditionally
granted by British courts of equity in 1789:
[T]he equity jurisdiction of the federal
courts is the jurisdiction in equity
exercised by the High Court of Chancery
in England at the time of the adoption of
the Constitution and the enactment of the
original Judiciary Act. ... The substantive
prerequisites for obtaining an equitable
remedy ... depend on traditional
principles of equity jurisdiction. We must
ask, therefore, whether the relief
respondents requested here was
traditionally accepted by courts of equity.
Grupo Mexicano de Desarrollo S.A. v. Alliance Bond
Fund, 527 U.S. 308, 319 (1999).
“Disgorgement” as a judicial remedy is a
relatively recent invention. Although some appeals
courts that have upheld SEC disgorgement have done
so by labeling disgorgement an “equitable” remedy, see,
e.g., SEC v. First Jersey Securities, Inc., 101 F.3d 1450,
23
1474-75 (1996), there is no evidence that the High
Court of Chancery in 1789 traditionally granted relief
at all similar to SEC disgorgement. Legal scholars
concur that no such relief was granted. See, e.g.,
Francesco A. DeLuca, Sheathing Restitution’s Dagger
Under the Securities Acts: Why Federal Courts Are
Powerless to Order Disgorgement in SEC Enforcement
Proceedings, 33 Rev. Banking & Fin. L. 899 (2014).
Some disgorgement proponents have suggested
that disgorgement is somewhat analogous to the
remedy of accounting, an eighteenth-century equitable
remedy to recover the income from one’s property
wrongfully retained by a fiduciary. A plaintiff who
established the right to an accounting was entitled to
a money judgment equal to the defendant’s ill-gotten
gains. But any similarity between SEC disgorgement
and the remedy of accounting is superficial at best. See
DeLuca at 913-16. The SEC claims the right to
disgorgement without regard to whether those alleged
to have violated the securities laws were fiduciaries,
which they often are not. And, of course, alleged
violators are never in a fiduciary relationship with the
SEC itself.
To support its inherent-equitable-power-toorder-disgorgement argument, the SEC relies
principally on Porter v. Warner Holding Co., 328 U.S.
395 (1946). SEC Opp. Br. 5; SEC 9th Cir. Br. 51.
Porter is inapposite. It held that the Emergency Price
Control Act (EPCA) authorized the federal government,
on behalf of tenants, to seek restitution from landlords
who collected rents in excess of the permissible
maximums established during World War II. 328 U.S.
24
at 398-99.11 A decision upholding restitution under a
statute that authorizes restitution provides no support
for the SEC’s assertion that federal courts possess
inherent authority to order disgorgement even though
that remedy is not granted by the federal securities
laws.
Porter noted that the United States, by seeking
to enjoin alleged violations of EPCA, had invoked the
federal court’s equity jurisdiction; the Court stated in
dicta, “Unless otherwise provided by statute, all the
inherent equitable powers of the District Court are
available for the proper and complete exercise of that
jurisdiction.” Id. at 398. But contrary to the SEC’s
suggestion, that statement does not empower district
courts to grant any remedy (unless expressly
prohibited) that the court deems necessary to afford
“complete relief.” Rather, Porter expressly limited
available remedies to those falling within the federal
courts’ “equitable powers.” And, as explained above,
disgorgement of ill-gotten gains is not within the
equitable powers conferred on federal courts by the
Judiciary Act of 1789.12
11
EPCA authorized district courts, upon finding a
statutory violation, to issue an injunction “or other order.” Porter
construed the term “other order” as encompassing restitution
orders. 328 U.S. at 399.
12
The Court confirmed WLF’s understanding of Porter in
its 1996 Meghrig decision, which stated, “the Government does not
rely on the remedies expressly provided in [RCRA], but rather cites
a line of cases holding that district courts retain inherent authority
to award any equitable remedy that is not expressly taken away
from them by Congress. See, e.g., Porter.” Meghrig, 516 U.S. at
487 (emphasis added).
25
There is also considerable reason to doubt that
Congress intends to grant federal courts any inherent
powers to award remedies not provided for in a statute
when, as here, the statute provides a federal
enforcement agency with detailed, extensive
enforcement powers. In recent decades, the Court has
indicated that Porter’s “all the inherent equitable
powers” dicta does not apply to such statutes. For
example, in Meghrig, both the United States and the
plaintiff argued that even though RCRA did not
expressly provide the remedy they sought
(reimbursement for RCRA clean-up costs), federal
courts possessed inherent authority to provide that
allegedly “equitable” remedy. Even though RCRA did
not expressly bar the requested remedy, Meghrig held
that federal courts did not possess inherent authority
to grant it. The Court explained, “[W]here Congress
has provided elaborate enforcement provisions for
remedying the violations of a federal statute, it cannot
be assumed that Congress intended to authorize by
implication additional judicial remedies.” Meghrig, 516
at 487-88 (citations omitted). “[I]t is an elementary
canon of statutory construction that where a statute
expressly provides a particular remedy or remedies, a
court must be chary of reading others into it.” Id. at
488 (quoting Middlesex County Sewerage Auth. v.
National Sea Clammers Ass’n, 453 U.S. 1, 14-15
(1981)).
Here, no less than in Meghrig, Congress has
created a comprehensive remedial scheme that
provides the SEC with a variety of enforcement tools.
Those expressly granted tools include disgorgement,
but only if the SEC chooses to pursue administrative
enforcement, not if it files a federal court proceeding.
26
Under those circumstances, Congress should not be
deemed to have granted federal courts the inherent
equitable power to grant disgorgement remedies to the
SEC—even if disgorgement could properly be classified
as an equitable remedy (which it cannot).
CONCLUSION
The Court should reverse the judgment below.
Respectfully submitted,
Richard A. Samp
(Counsel of Record)
Marc B. Robertson
Washington Legal Foundation
2009 Massachusetts Ave., NW
Washington, DC 20036
(202) 588-0302
rsamp@wlf.org
December 23, 2019
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.