Supreme Court: SEC can recoup fraud funds

WASHINGTON — The Supreme Court on Monday preserved an important tool used by securities regulators to recoup ill-gotten gains in fraud cases.

By an 8-1 vote, the justices ruled that the Securities and Exchange Commission can seek to recover the money through a process called disgorgement. Last year, the SEC obtained $3.2 billion in repayment of profits from people who have been found to violate securities law.

“The court holds today that a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under” federal law, said Justice Sonia Sotomayor for the court in Liu vs. SEC. But the “case is remanded for the courts below to ensure the award was so limited.”

Justice Clarence Thomas dissented.

The case involved a California couple accused of running a $27 million stock scheme. Authorities said Charles Liu and Xin Wang lured investors for a cancer treatment center that was never built, spending much of the proceeds for their own benefit. The SEC demanded they “disgorge” the entire $27 million that was collected, and it won in the lower courts.

The Supreme Court in 2017 unanimously limited the SEC’s ability to go after profits where alleged fraud has been going on for years before authorities file charges. That case left open the question the high court answered Monday, that courts have the authority to order disgorgement of profits. The SEC has continued to aggressively pursue defendants’ profits in fraud cases.

But although the justices affirmed the SEC’s power to seek disgorgement of ill-gotten gains, they also told the 9th Circuit Court to reconsider the amount. The couple said they spent some of the money for legitimate business expenses.