Cert. petition seeks remand of Liu net profits issues

By Mark S. Nelson, J.D.

A petition for certiorari filed in the U.S. Supreme Court seeks a remedy akin to a grant, vacate and remand (GVR) in order to have the lower federal courts properly apply the methodology established by the justices in Liu v. SEC. According to the petition, the district court, issuing its disgorgement order pre-Liu, used a calculation that would no longer be permitted under Liu, which was decided before the Seventh Circuit affirmed the district court’s disgorgement award to the SEC. The petition asks the justices to grant the petition, summarily reverse the Seventh Circuit, and then remand the case to the district court for a reconsideration of the disgorgement issue that is consistent with Liu or otherwise to strike the disgorgement award. Depending on whether a lower court finding is moot, the petition added, it also may be necessary for the SEC to show that it would be infeasible to distribute any disgorgement award to harmed investors (Goulding v. SEC, January 20, 2023).

Adviser Act allegations. Petitioner Randall Goulding became the target of an SEC enforcement action in 2009 in which the SEC alleged that Goulding violated numerous provisions of the Investment Adviser’s Act. Specifically, the petition recounts that the SEC claimed Goulding failed to keep accurate books and records, facilitated loans and other transfers of funds to third parties, used some funds for his personal use, facilitated valuation errors, and produced inaccurate quarterly reports.

The district court, in 2019, after holding a bench trial, found Goulding liable for the SEC’s civil charges. The district court also awarded the SEC disgorgement based on a calculation that relied on the difference between certain deposits and withdrawals, thus resulting in a disgorgement award of $642,422. In 2022, several years post-Liu, the Seventh Circuit affirmed the district court.

Net profits ignored? According to the petition, the disgorgement award ran afoul of the Supreme Court’s Liu opinion because it failed to account for both the net profits and investor benefit prongs of Lui’s methodology for calculating disgorgement amounts that are not penalties. The petition recited that, under Liu, a non-penalty disgorgement award must: (1) not exceed the defendant’s net profit from wrongdoing; and (2) be awarded for the benefit of investors.

Specifically, the petition asks three interrelated questions:

• Does an award of disgorgement violate the principles announced by the Supreme Court in Liu where the defendant's withdrawals from a business were not linked to alleged wrongdoing in the context of a business that was at least partially legitimate and conducted in a non-fraudulent manner?
• Can a district court shift the burden of calculating the amount of disgorgement to a defendant when the SEC is unable to make the calculation itself?
• Can a district court order disgorgement to be sent to the Treasury when the SEC has not shown the infeasibility of distributing funds to known, aggrieved investors?

The first two questions can almost be collapsed into a single question because they both essentially turn on the petition’s asserted failure of the lower courts to use net profits as the touchstone for the disgorgement award. As a result, said the petition, the pre-Liu burden-shifting framework would only meet the demands of Liu if a disgorgement award were based on net profits and awarded for the benefit of investors. Moreover, the petition noted that the lower courts did not deduct from the disgorgement award legitimate revenues from some business activities.

With respect to infeasibility, the petition asserted that the district court and the parties are aware of the 328 investors who are individuals and entities that invested with Nutmeg Group as limited partners. As a result, the petition asks for the SEC to be required to provide a plan to distribute disgorged funds to harmed investors or, alternatively, for the SEC to demonstrate that such distribution is infeasible.

The case is No. 22-687.