By Rodney F. Tonkovic, J.D.
Charles C. Liu, whose case went before the Supreme Court in 2020, has been ordered to disgorge the net profits of his alleged conduct. Liu was ordered to disgorge $27 million in profits in 2018 for his role in an EB-5 investors scam. He then petitioned the Supreme Court to rule on the SEC's authority to seek disgorgement, and the Court answered in the affirmative, with some caveats, in 2020. Pursuant to the district court's final judgment order, Liu and his wife are now jointly and severally liable for disgorgement of nearly $21 million (SEC v. Liu, July 14, 2021, Carney, C.).
The case against Liu. In May 2016, the SEC charged Charles Liu and his wife Xin "Lisa" Wang with fraudulently inducing investors out of $27 million. Liu raised the money from 50 China-based investors through the EB-5 immigrant investor program, purportedly to build a cancer treatment center. There was no construction, and Liu instead transferred $11 million to three firms in China and diverted another $7 million to his and his wife's personal accounts.
In 2018, the district court ordered Liu, Wang, and three other defendant entities to disgorge nearly $27 million. The Ninth Circuit, in an unpublished decision, affirmed, explaining that the Supreme Court's Kokesh decision had left the question of the federal courts' authority to award disgorgement for another day, and concluded that the proper amount of disgorgement is "the entire amount raised less the money paid back to the investors."
Liu then asked the Supreme Court to take up the question of whether the SEC may seek and obtain disgorgement from a court as "equitable relief" for a securities law violation. Liu argued. Certiorari was granted in November 2019, and the Court issued its opinion in June 2020, affirming the SEC's ability to seek disgorgement in civil proceedings as a form of equitable relief, so long as the award is limited to the net profits of the wrongdoer and funds go to victims. The judgment was vacated and the matter remanded to the Ninth Circuit.
Most recently, in March 2021, the Ninth Circuit let stand an asset freeze and preliminary injunction against Liu. On remand from the appellate court, the district court renewed a freeze on all of Liu's assets pending a decision on the proper amount of net profits to disgorge. The Ninth Circuit reviewed the district court's preliminary injunction for abuse of discretion and found none.
The order. The court enjoined Liu and the other defendants from violating Section 17(a) of the Securities Act and from offering investments in a "commercial enterprise" under the EB-5 program. Liu and Wang were then ordered to pay $20,871,758.81, "representing net profits gained as a result of the conduct alleged in the complaint," plus $70,713.06 in prejudgment interest. Liu will also pay a $6,714,560 civil penalty, and Wang will pay $1,538,000. In addition, J.P. Morgan Chase Bank, N.A. Citibank, N.A., Wells Fargo Bank, N.A., and East West Bank were ordered to transfer the entire balance of 13 accounts held by Liu, Wang, Proton, and other entities to the Commission; the accounts had been previously frozen pursuant to a court order.
The case is No. 8:16-cv-00974.