Last summer, the U.S. Supreme Court’s decision in Liu v. SEC reaffirmed the SEC’s authority to seek disgorgement as an equitable remedy in enforcement actions. But, the Court placed limits on that authority. The Court’s decision said that courts must deduct “legitimate expenses” from disgorgement awards and an award must be distributed to the victims. Several questions were left open by the decision, and a Davis Polk memo discusses the possible effect of Liu on insider trading cases when victims aren’t easy to identify and such distribution is basically infeasible.
The memo says it will take time before we fully understand the consequences of Liu but there are indications that when distribution of disgorgement awards is infeasible, the SEC may choose to forgo disgorgement and instead seek greater penalties:
The memo notes a recent speech by Director of Enforcement Stephanie Avakian in which she suggested the SEC might compensate for potential limitations on its disgorgement authority by seeking increased penalties.
Also, in recent weeks, the SEC has settled several insider trading cases without obtaining any disgorgement and, instead, imposed a penalty equivalent to two-times the wrongful gains/losses avoided. The SEC has taken this approach in both district court actions and administrative proceedings, even though the holding in Liu concerned only district court actions. We note, however, that the SEC is still seeking disgorgement in some insider trading actions filed post-Liu, most notably in U.S. v. Bohra, a district court action in which the SEC is seeking disgorgement of ill-gotten gains and civil penalties in a case concerning alleged trading in advance of earnings releases.
-Lynn Jokela, TheCorporateCounsel.net October 9, 2020
