Yesterday, in an 8-1 decision, the US Supreme Court reaffirmed the SEC’s authority to seek disgorgement as a remedy in enforcement actions — but placed limits on the scope of the remedy. Justice Sotomayor’s opinion, in Liu v. SEC, held that a disgorgement award that doesn’t exceed a wrongdoer’s net profits and is returned to the “wronged investors” is equitable relief permissible under 15 USC §78u(d)(5). Justice Thomas issued a dissenting opinion. Briefly, here’s how the case arose:
Liu involved a case of a California couple that contested an SEC enforcement action brought against them in connection with their solicitation of nearly $27 million from foreign nationals to build a never-completed cancer treatment center. The district court ordered disgorgement of the full amount the couple raised from investors, less a small amount remaining in corporate accounts. The couple then objected, saying the disgorgement amount didn’t account for their business expenses. The Ninth Circuit affirmed and the couple brought the case before the U.S. Supreme Court.
The couple claimed that the Court’s Kokesh decision meant that disgorgement is a “penalty,” and thus not the kind of relief available at equity. Justice Sotomayor’s opinion in Liu said, ‘Not so.’ The Court remanded Liu to the lower courts to decide the issues about limiting the disgorgement order to the couple’s net profits from the cancer center investment scheme and awarding it to the victims. Justice Sotomayor’s opinion includes discussion of principles to help guide the lower courts’ assessment.
When the Supreme Court agreed to hear the Liu case last fall, it sparked speculation about whether disgorgement might be removed entirely from the SEC’s arsenal of remedies. If disgorgement was no longer available as a remedy in enforcement actions, it could’ve greatly reduced the SEC’s leverage in settlement negotiations. The questions started a couple of years ago when the Court decided Kokesh v. SEC, which held disgorgement in an SEC enforcement action constitutes a “penalty” for purposes of the applicable statute of limitations. Justice Sotomayor’s opinion in that case included a footnote saying the Court didn’t decide whether courts have authority to order disgorgement in SEC enforcement proceedings or whether courts have properly applied disgorgement principles in this context.
Now, we know that disgorgement will continue as a potential remedy in SEC enforcement proceedings — but that courts must deduct “legitimate expenses” and the award must benefit the victims. As a Goodwin memo notes, there are still some open questions. We’ll be posting more memos in our “SEC Enforcement” Practice Area.
-Lynn Jokela, TheCorporateCounsel.net June 23, 2020
