Is disgorgement still permissible in an SEC federal court action after Liu v SEC?

The Supreme Court said yes but with limits.  Disgorgement is permissible but only if it complies with the traditional definition of equitable relief and not penalty.  In an 8-1 vote, the United States Supreme Court held that disgorgement is permitted under 15 U.S.C. §78u(d)(5) if the amount awarded does not exceed an individual wrongdoer’s net profits;  is awarded to the victims; and is imposed on an individual and not based on joint and several liability, unless it falls under the exception. 

The Lius, a husband and wife team, solicited $27 million of investments from foreign nationals to build a cancer treatment center.  Under the U.S. immigration laws, foreigners who invest over $1 million (in 2019 it was increased to $1.8 million) in an approved commercial enterprise are eligible to receive permanent residency in the United States. The SEC alleged that the Lius, in their solicitations, misrepresented that the bulk of the investment would be applied towards the construction of the center.  Instead, the majority of the funds were used for salaries, marketing materials and were diverted to personal accounts.  Only a fraction of the amount collected was used towards construction.  The SEC brought a civil action for injunctive relief in federal court. The trial court granted the injunction barring the Lius from participating in the immigration investor’s program and ordering them to pay disgorgement for the full amount collected and held them jointly-and severally liable.   

The Lius claimed that the “disgorgement”, as awarded by the District Court, was effectively a penalty not permissible under the statute in a federal court action. The Lius argued that only equitable relief is authorized by Congress under the statute.  The Court analyzed whether the order of disgorgement can be viewed as a traditional relief under equity. The Lius argued that their disgorgement order was unlawful because it contradicted the traditional practice in equity in three ways: by ordering disgorgement of the total profits and not deducting legitimate expenses, imposing joint-and-several disgorgement liability, and ordering the profits be deposited in Treasury funds instead of disbursing the entire amount to victims. The Court agreed.

In its analysis, the Court found that courts have traditionally granted victims the “ill-gotten gains” from wrongdoers whether it is called restitution, disgorgement or accounting.  Justice Sotomayor, in writing the  opinion, stated that a fundamental principle behind equitable relief is that the wrongdoer should not be permitted to make a profit from his/her malfeasance. The profit, though, should exclude legitimate business expenses.  The Court exempted those situations where the “entire profit of a business or undertaking” results from the wrongful activity.” In the Lius’ case, the Court held that there were legitimate expenses, such as a lease and the purchase of certain cancer treatment equipment, that were legitimate and thus, should be deducted from the profits.

The Court further held that imposing joint-and-several liability on multiple defendants can “transform any equitable profits-focused remedy into a penalty”. This practice, explains the Court, is contrary to the common law rule imposing liability on individuals for ill-gotten profits.  The Supreme Court did carve out an exception where “partners engaged in concerted wrongdoing” such as a husband and wife team whose bank accounts are co-mingled and who were in concert with each other in undertaking the fraud.

The Court discussed the SEC’s practice of depositing disgorged funds into the Treasury. It stated that although there is little guidance to determine whether or not returning the ill-gotten profits to the victims satisfies the statute’s mandate that any remedy must be “appropriate or necessary for the benefit of investors”, the Court stated that the “equitable nature of the profits remedy generally requires the SEC to return a defendant’s gains to wronged investors for their benefit.” The Court rejected the SEC’s argument that depriving the wrongdoer of his/her profits is the benefit to the public. The Court did not decide the issue of whether depositing disgorged funds into the Treasury benefited the investors because there was no evidence that the disgorged funds were ordered to be deposited into the Treasury.  Instead, the Court remanded the case to the lower court to determine whether there was such an order and, if so, to decide whether depositing disgorged funds into the Treasury benefited the investors.

Although the Court decided that disgorgement is to be viewed as an equitable relief and not punitive, lower courts will still have to grapple with whether costs are legitimate; whether multiple defendants are engaged in a concerted wrongdoing and be so financially intertwined as to render them jointly and severally disgorgement liable; and whether depositing the ill-gotten gains into the Treasury benefits the investors.  Defendants facing disgorgement liability need to be cognizant of this ruling and seek competent attorneys who can prepare a defense on these issues from the start of the case.”

An Educational Institution’s Survival Guide for the Final Title IX Regulations

On May 6, 2020 the U.S. Department of Education (DOE) released the long-awaited final Title IX regulations.  The Final Regulations provide specific guidance to colleges and universities on how they must respond to allegations of sexual misconduct and other Title IX covered conduct.  The Final Rule goes into effect on August 14, 2020.  

The Final Regulations require significant changes, including that the educational institution: provide to Complainant and Respondent a full investigative report prior to any hearing; engage in a significantly more robust hearing process (following definitive guidance related to witness testimony, cross examination, evidence, transcripts/recordings of the hearings, and information that can be considered by the panel); publish a report setting forth the panel’s findings on responsibility; and offer specific guidance related to the appeal process.

How We Can Help

There are several obligations in the Final Regulations that likely will require modifications to many current Title IX policies.  We can help with not only the revision of these policies, but also with the training of Title IX personnel and other relevant stakeholders to ensure full compliance throughout the Title IX process. 

We can serve the role of an advisor on behalf of an institution in a live hearing, assisting the hearing panel to navigate the more robust hearing requirements and providing guidance and counsel to hearing panels when they formulate written determinations post-hearing.  Further, we have substantial experience conducting Title IX investigations and preparing written investigative reports. 

Please let us know how we may assist you in ensuring compliance with these Final Regulations.

The Rundown

The following guide lists some of the more significant changes mandated by the Final Regulations.  Educational institutions can use this guide to determine what changes will need to be made to bring their Title IX policies and procedures into compliance. 

    1. Notice to the Institution
      1. Notice to a Title IX Coordinator or to an official with authority to institute corrective measures, charges an institution with actual knowledge and triggers the school’s response obligation.
      2. Actual knowledge is defined as notice of sexual harassment or allegations of sexual harassment to an institution’s Title IX Coordinator or any official of the school “who has authority to institute corrective measures on behalf of the [institution].”
    2. Definition of Sexual Harassment
      1. Includes the following three types of misconduct on the basis of sex: (i) quid pro quo harassment by an institution’s employee; (ii) any unwelcome conduct that a reasonable person would find so severe, pervasive, and objectively offensive that it denies a person equal education; and  (iii) any instance of sexual assault (as defined by the Clery Act), dating violence, domestic violence, or stalking (as defined by VAWA).
      2. Requires the conduct to be severe and pervasive and objectively offensive conduct.
    3. Required Response Limited to Campus-Sanctioned Programs or Activities – educational institutions only need to respond to complaints of misconduct that take place at an institution’s “program or activity.”
    4. Who is Required to Report Allegations of a Title IX Violation – only notice to certain employees of the educational institution trigger the obligation for the educational institution to respond to an alleged Title IX violation.  Designated employees must be referred as the “Title IX Coordinator.”
    5. Notice of Title IX Protections – Institutions must notify students, employees, applicants for admissions and employment, and unions of the Title IX Coordinator’s contact information and must prominently display on their websites the Title IX Coordinator’s contact information.
    6. Informal and Formal Complaints – any person may report sex discrimination at any time.
    7. Deliberate Indifference Standard – institutions must respond promptly in a manner that is not clearly unreasonable in light of the known circumstances.
    8. Mandatory Response Obligations
      1. Institutions must offer supportive measures to the complainant.
      2. Title IX Coordinator must contact the complainant confidentially.
      3. Institutions must follow Title IX’s grievance process before imposing any disciplinary sanctions.
      4. Institutions may not restrict Constitutional protections.
      5. Institutions must investigate sexual harassment allegations in any formal complaint.
      6. Institutions must respect complainant’s wishes whether to investigate unless the Title IX Coordinator determines that continuing an investigation over the wishes of the complainant is not unreasonable.
      7. If allegations in the formal complaint do not met the definition of sexual harassment or did not occur at the institution, the institution must dismiss allegations for the purposes of Title IX but can still investigate the matter.
    9. Procedure Once an Institution Has Received Actual Knowledge
      1. Treat complainants and respondents equitably;
      2. Remedies must be designed to maintain complainant’s equal access to education;
      3. Evaluate all relevant evidence, including both inculpatory and exculpatory evidence, and avoid credibility determinations based on the person’s status as complainant, respondent, or witness;
      4. Ensure that coordinators, investigators, or decision-makers do not have conflicts of interest or bias against either the complainant or respondent;
      5. Training Title IX personnel on the definition of sexual harassment, scope of the institution’s programs or activities, how to investigate a complaint and perform the grievance process, how to serve impartially, and additional issues of relevance, including rape shield protections:
      6. Rely on the presumption that the respondent is not responsible for the alleged conduct unless proved otherwise at the conclusion of the grievance process;
      7. Complete the grievance process reasonably promptly;
      8. Describe the range of possible sanctions and remedies;
      9. Describe the standard of evidence to be used to determine responsibility;
      10. Describe the procedures and bases for appeal;
      11. Describe the range of supportive measures available; and
      12. Post materials used to train Title IX personnel on their website.
    10. Ongoing Obligation to Provide Written Notice to Parties – institutions must provide written notice to the parties containing Title IX procedures, a detailed statement of the allegations, investigations, hearings and meetings.
    11. Advisors– Parties can select an advisor of the party’s choice.  If a party does not have an advisor, the institution must provide one without a fee.
    12. Live Hearings for Institutions of Higher Learning – a meaningful change to the regulation requires colleges and universities that receive federal funding to include a live hearing as part of the Title IX process. The requirements for a live hearing include:
      1. Each party’s advisor must be permitted to cross-examine the other party or witnesses and must be conducted directly, orally and in real time by the party’s advisor (not by the party personally).
      2. Cross examination questions must be relevant and the decision-maker must first determine the relevancy before the question is answered.
      3. At the request of either party, the institution must provide for the entire hearing to occur with the parties located in separate rooms.
      4. If a party or witness decides not to submit to cross-examination, the decision-maker may not rely on any statement of that witness in reaching an ultimate determination.
      5. Create an audio or audiovisual recording or transcript of the hearing.
      6. Rape Shield Protections make irrelevant any questions related to complainant’s prior sexual behavior with limited exceptions.
    13. No More “Single-Investigator” Model – the decision-maker cannot be the same person as the Title IX Coordinator or the investigator, moving away from the current single-investigator model.
    14. Requirement of a Final Report – Perhaps most drastic for those who will serve as decision-makers, the regulation, if passed, requires the decision-maker to draft a final determination following the hearing, essentially rendering an opinion for the record.
    15. Evidence Requirement –  the burden of gathering evidence and burden of proof remains on the institutions.  Institutions cannot restrict the parties from discussing the allegations or gathering evidence.  At least ten days prior to a hearing, the institution needs to provide the parties with evidence directly related to the allegations.
    16. Investigative Report Requirement – at least ten days prior to a hearing, the institution needs to provide the parties with copies of an investigative report that details the relevant evidence.
    17. Standard of Evidence in Hearings – the institution may use either the preponderance of the evidence standard or the clear and convincing evidence standard. The standard used for students and employees must be consistent.
    18. Appeals – the institution must offer both parties an appeal on the following basis: (i) procedural irregularity; (ii) newly discovered evidence, and/or (iii) Title IX personnel had a conflict of interest or bias. Institutions may offer additional bases for an appeal.
    19. Informal Resolution – the institution may choose to offer informal resolutions, such as mediation or restorative justice, if both parties consent. An institution may not require the parties to participate in informal resolution and may not offer informal resolution unless a formal complaint is filed.

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