In an unpublished decision, the U.S. Court of Appeals for the Ninth Circuit reversed a U.S. District Court for the Central District of California decision on remedies. The Ninth Circuit remanded the case with instruction for further consideration of penalty and disgorgement amounts imposed on defendants accused of defrauding foreign investors seeking to obtain U.S. visas through the EB-5 Immigrant Investor Program.

Following a 2018 bifurcated settlement in which the defendants acknowledged their liability and agreed to have the appropriate remedies decided by the Court, the District Court granted the SEC a $15.5 million judgment which included more than $3 million in disgorgement and prejudgment interest. The Ninth Circuit reversed the remedies decision and remanded the case back to the District Court for further proceedings.

The Ninth Circuit reversed the District Court's Order of Disgorgement because it was unclear whether the decision complied with the Supreme Court's recent decision in Liu v. SEC, 140 S. Ct. 1936, 1940 (2020) in two ways. First, it was it was unclear whether the District Court had properly held the individual defendants jointly and severally liable for the disgorgement amounts. Second, it was unclear whether the disgorgement amounts ordered were "appropriate and necessary for the benefit of investors."

The Ninth Circuit also found that the District Court failed to adequately explain its rationale for granting the SEC's penalty request and did not discuss the factors set out in SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980). The Ninth Circuit remanded the case to the District Court to consider whether the penalty amount requested by the SEC was appropriate.

Commentary - Kyle DeYoung

The Supreme Court's landmark decision in Liu v. SEC is less than two months old, yet the ramifications of the decision on the SEC's enforcement powers are already starting to take shape. While it is unlikely the District Court will change its mind on the joint and several liability issue, the question of whether funds can be effectively returned to investors is a more difficult issue that the SEC and District Court will have to grapple with here. If the funds can't be returned to investors, the District Court may need to reach the issue of whether the SEC can obtain disgorgement in situations in which the money goes to the U.S. Treasury Department. As discussed previously, the Supreme Court's decision in Liu casts serious doubt on the SEC's ability to do so, and a decision reaching this conclusion would have significant implications on the SEC's enforcement program. The stakes are high for the SEC on remand. Practitioners, as well as the SEC's leadership, will be watching this one closely.

Primary Sources

1. U.S. Court of Appeals for the Ninth Circuit, Memorandum: U.S. Securities and Exchange Commission v. Robert Yang; et al.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.