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Courts may not enter disgorgement awards that exceed the gains made upon any business or investment, when both the receipts and payments are taken into the account. Accordingly, courts must deduct legitimate expenses before ordering disgorgement under 15 U.S.C.S. § 78u(d)(5). A rule to the contrary that makes no allowance for the cost and expense of conducting a business would be inconsistent with the ordinary principles and practice of courts of chancery.
Petitioners Charles Liu and Xin Wang solicited foreign nationals to invest in the construction of a cancer-treatment center, but, an SEC investigation revealed, misappropriated much of the funds in violation of the terms of a private offering memorandum. Pursuant to 15 U. S. C. §78u(d)(5), the SEC brought a civil action against petitioners, seeking disgorgement equal to the full amount petitioners had raised from investors. Petitioners argued that the disgorgement remedy failed to account for their legitimate business expenses, but the District Court disagreed and ordered petitioners jointly and severally liable for the full amount. The Ninth Circuit affirmed.
Did the 15 U. S. C. §78u(d)(5) authorize the SEC to seek disgorgement beyond a defendant’s net profits from wrongdoing?
The Court held that courts may not enter disgorgement awards that would exceed the gains “made upon any business or investment, when both the receipts and payments are taken into the account.” According to the Court, when the “entire profit of a business or undertaking” resulted from the wrongdoing, a defendant may be denied “inequitable deductions.” The Court averred that a disgorgement award that did not exceed a wrongdoer’s net profits and was awarded for victims was equitable relief permissible under 15 U.S.C.S. § 78u(d)(5) because restricting awards to net profits from wrongdoing after deducting legitimate expenses fell comfortably within categories of relief that were typically available in equity. Moreover, Congress's use of the term disgorgement in assorted statutes did not expand the contours of that term beyond a defendant's net profits. Accordingly, the judgment was vacated and the case was remanded.