It was just a few years ago that any court case involving EB-5 and securities law was notable and worthy of an article, but those days are long past. Since the end of EB-5’s age of innocence (or more correctly put, days of unchecked wayward behavior) the number of actions involving EB-5 and securities fraud increased and the lessons to be learned lessened with each subsequent action. Many evildoers were caught and subsequently punished, a few of the bigger fish seemed to have gotten away.
On June 22, 2020, the US Supreme Court decided Liu v. Securities and Exchange Commission, 591 U.S. ___ (2020), in an 8-1 decision authored by Justice Sotomayor.
For the full opinion, see here: https://www.supremecourt.gov/opinion…-1501_8n5a.pdf
For a nice summary of the case, see this link: https://www.oyez.org/cases/2019/18-1501
The Liu case represents a lasting contribution by EB-5 to the body of federal securities law. The underlying case itself was of garden variety fraud and misappropriation in which Mr. Liu and his wife took millions of their investors’ dollars while also running a somewhat legitimate business enterprise (funded by those investors). What made this case interesting for the Supreme Court was Liu’s claim that SEC did not have the power to seek equitable disgorgement from the defendants of all the investment capital, a typical remedy sought by the SEC.
The SEC had sought disgorgement of the entire $26 million Liu received from the investors. Lui claimed that disgorgement should not include the legitimate expenses of the business. Eight out of the nine Justices agreed that the SEC had overstepped the bounds of the traditional equitable action. Justice Sotomayor wrote for the majority that a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under 15 U.S.C. § 78u(d)(5). This greatly limited the SEC’s typical disgorgement action where the SEC seeks to have all investment funds returned, as opposed to only the profit of the individual defendants.
This is notable for securities law in general as the nearly unanimous court served a blow to the SEC’s bravado in what is usually an unchecked self-appointed power to be the all-enforcing financial cop. One might wonder whether the same Court would similarly clip the SEC’s wings if it is ever called upon to judge the merits of the SEC’s position that effectively makes all finders broker-dealers and the subject to federal securities law.
The holding is also reminiscent of the recent Zhang case (see https://discuss.ilw.com/articles/art…by-matt-gordon with a link to the full case in that article) in which the Federal District court refused to allow USCIS unfettered power in interpreting its own rules and would not allow them to make up new rules without rigorously following the Administrative Procedures Act.
Keeping the executive branch in check, as the court has done with Liu, shows that the checks and balances remains alive and well, notwithstanding the fears of many who thought the ‘conservative’ majority on the court would be a rubber stamp for the present Administration. Thankfully, the Supreme Court continues to fulfill its Constitutional role as the neutral and impartial interpreter of the law.
About The Author
Matt Gordon is a noted policy expert in the visa-based investments field and is an authority on structuring visa-based investments. Mr. Gordon’s career spans business operations, finance and law. He is the editor of the EB-5 Book, the legal treatise on the EB-5 program and a frequent lecturer to immigration attorneys. Mr. Gordon has participated in policy events, including those hosted by the White House and Harvard University’s Kennedy School of Government. Prior to founding E3iG, Mr. Gordon was an investment banker for a decade and ran the US division of a Swiss multi-national corporation. Mr. Gordon is a licensed attorney, having practiced mergers and acquisitions law at the beginning of his career with the largest and most reputable Wall Street firms including Fried Frank and Sullivan & Cromwell. Mr. Gordon received his B.S. in Policy Analysis from Cornell University and his J.D., cum laude, from the University of Pennsylvania School of Law.