The Supreme Court’s ruling in Liu v SEC, issued this week, is a significant win for the Securities and Exchange Commission’s whistleblower program.
The court affirmed the SEC’s ability to order disgorgements – a legal remedy that forces fraudsters to return ill-gotten gains to harmed investors – although it put certain limitations on that authority.
The Liu v SEC opinion benefits investors and SEC enforcement, while also reassuring SEC whistleblowers. Robust remedies coupled with an effective whistleblower program are powerful deterrents for financial fraudsters.
Half of the SEC sanctions attributed to whistleblower cases come from disgorgement. Whistleblower cases have allowed the SEC to recover more than $1 billion in disgorgements and an additional $1 billion in other related monetary sanctions.
Whistleblowers come forward to stop illegal conduct and to help harmed investors get their money back, which happens through disgorgement. They also want the personal and professional risks they take by blowing the whistle to be balanced out by a meaningful SEC award, part of which is often based on disgorgement.
Liu v SEC had the potential to discourage whistleblowers in two ways: by restricting the ability of the SEC to return funds to harmed investors through disgorgement and by shrinking the amounts on which whistleblower awards are based, decreasing awards.
The Supreme Court voted 8-1 to uphold the SEC’s disgorgement power. However, the court said, the SEC cannot order wrongdoers to disgorge sums greater than their net ill-gotten profits and the disgorgement should benefit investors who were victims of an alleged fraud.
Justice Sonia Sotomayor wrote the court’s majority opinion. Conservative Justice Clarence Thomas dissented, stating that disgorgement was not a valid remedy.
The SEC welcomed the ruling. The court’s decision “allows us to strip wrongdoers of their ill-gotten gains and return money to its rightful owners, following the court’s direction to ensure that our efforts embody principles of equity and fairness,” a SEC spokesperson said.
Liu v SEC was brought by a California couple who appealed a 2016 SEC order. The commission ordered Charles Liu and Xin Wang to disgorge nearly $27 million, based on the amount they raised by soliciting foreign investment under the EB-5 visa program for the construction of a cancer treatment center. Under the EB-5 program, wealthy foreign investors can gain access to visas by investing at least $500,000 in certain American job-creating projects.
The SEC alleged Liu and Wang funneled the money instead to themselves and entities they controlled. The treatment center was never built.
How the SEC whistleblower program works
After the financial crisis of 2008, Congress created the SEC whistleblower program as part of the Dodd-Frank Act in 2010 to encourage whistleblowers to report fraud and various forms of securities law violations.
The law offers whistleblowers protection from job retaliation, confidentiality and – if monetary sanctions collected exceed more than $1 million – rewards.
Whistleblowers who are fired, harassed, demoted, discriminated against or suffer any other forms of retaliation can sue for reinstatement and back-pay. The SEC keeps whistleblowers identities confidential. Whistleblowers may report their allegations anonymously through an attorney.
The SEC has awarded over $500 million to 83 individuals since issuing its first award in 2012. In 2020, the SEC has been making whistleblower awards at a record pace, including its largest whistleblower award ever, totaling nearly $50 million to a former banking insider.
SEC whistleblower awards are paid entirely from an investor protector fund established by Congress. The funds recovered for harmed investors are not affected by whistleblower awards.
ABOUT PHILLIPS & COHEN LLP
Phillips & Cohen is the most successful law firm representing whistleblowers, with recoveries from our cases totaling over $12.3 billion. We have been recognized for our work by numerous national awards. Our attorneys and cases have been in The New York Times, The Wall Street Journal, the Financial Times and other news media. Three of our cases were featured in the CBS series, “Whistleblower.” Phillips & Cohen’s roster includes former federal prosecutors, the first head of the SEC Office of the Whistleblower, a former deputy administrator of the Centers for Medicare and Medicaid Services, the author of a leading treatise on the False Claims Act and attorneys with decades of experience representing whistleblowers.