The Supreme Court signaled a willingness Tuesday to preserve in some form the SEC's ability to seek disgorgement of gains related to fraud, particularly if it helps reimburse losses to investors.
"Is it not an equitable principle that no one should be allowed to profit from his own wrong?" Justice Ruth Bader Ginsburg asked during oral arguments. Later, Justice Neil Gorsuch asked if the government would have any difficulty "with a rule that the money should be returned to investors where feasible."
The case, Charles C. Liu, et al. vs. Securities and Exchange Commission, stems from a civil lawsuit filed by the SEC against an investment scheme that raised $27 million from Chinese investors in a visa investment program. A federal court ordered the backers of the scheme to return, or disgorge, the money and pay a penalty of more than $8 million. The scheme's backers then petitioned the Supreme Court to decide whether disgorgement is the same as a penalty when used to discourage further fraud, and whether the SEC can then use it.
The distinction is important because a June 2017 Supreme Court ruling in Kokesh vs. SEC put a five-year time limit on SEC disgorgement practices, which the justices said were penalties covered under the statute of limitations.
In 2016, the SEC extracted almost $3 billion in disgorgement payments, more than double what it collected in other types of penalties. Its latest fiscal year enforcement report for 2019 said the decision "continues to adversely impact the agency's ability to return funds to harmed investors," causing it to forgo about $1.1 billion dollars in disgorgement in filed cases and requiring a shift in enforcement resources.
In November, the House passed bipartisan legislation giving the SEC more tools and time to seek disgorgement, with a 14-year statute of limitations and language preventing it from being defined as a penalty. Similar bipartisan legislation introduced in the Senate by Sens. Mark R. Warner, D-Va., and John Kennedy, R-La., members of the Senate Banking Committee, has not advanced.
In a joint statement, the senators said Tuesday that congressional action is necessary to affirm the SEC's disgorgement authority. A Supreme Court decision against the SEC will put "more money in the pockets of scammers and fraudsters while leaving ripped-off investors holding the bag," they said.