Supreme Court Upholds Right of Securities And Exchange Commission To Sue For Disgorgement But Limits Its Scope

Earlier this week, the Supreme Court ruled that the SEC is permitted to obtain ill-gotten gains from individuals convicted of securities violations through the oft-used process called disgorgement. For decades, the SEC has been permitted to obtain “equitable relief” by filing a civil suit against a securities violator – and in practice, the SEC has frequently done so by seeking a type of relief referred to as disgorgement. Three years ago, in Kokesh v. SEC, the Supreme Court found that disgorgement constitutes a “penalty” insofar as the statute of limitations is concerned, but left open the question of whether disgorgement could simultaneously be considered a type of “equitable relief,” which is what the SEC is permitted to pursue in civil cases. Post-Kokesh, there appeared to be some tension with categorizing disgorgement as equitable relief given that equitable relief never “lends its aid to enforce a forfeiture or penalty.”

The Supreme Court has now resolved this issue in the instant case, Liu v. SEC on June 23rd. The Court held in Liu that the disgorgement remedy itself was not necessarily a “penalty” and therefore could be pursued by the SEC in civil suits, but cautioned that certain restrictions would need to be maintained in order to ensure it stays within appropriate bounds. For instance, the amount of disgorgement ordered must be limited to a fraudster’s “net profits” from his scheme. As such, in calculating an appropriate disgorgement order, legitimate business expenses should be deducted from the amount earned through the scheme, in order to arrive at the appropriate total to be turned over to the Government. The Court also suggested that because disgorgement is equitable relief, the SEC must do more than use it to deprive a wrongdoer of his ill-gotten gains, and as such lower courts should assess whether the disgorgement judgment obtained by the SEC will actually benefit victims. Dissenting in Liu, Justice Thomas explained his concern about permitting disgorgement as a form of equitable relief since the term itself has no well-defined meaning, which therefore invites a likelihood of overreach by the SEC. Further, Justice Thomas felt that the majority should have more clearly limited the way disgorgement is used after it is collected, specifying that it should go to the victims only and not be used to enrich government agencies - after all, the purported purpose of disgorgement is to make victims whole.

Throughout the past several decades, federal courts around the country have issued wide-ranging and disparate opinions on the extent of permissible disgorgement sought from defendants and relief defendants in cases involving securities violations. One would expect that in the wake of Liu, courts will begin adhering to a more standardized pattern of addressing these cases, and that the SEC will reduce the scope of disgorgement requested from violators, as is prescribed by this opinion.

Nathans & Biddle LLP is a highly respected advocate for individuals and businesses involved in a broad spectrum of criminal and civil disputes, forfeitures, and attorney grievance matters. With offices in Baltimore, Annapolis, and Greenbelt, we represent clients across Maryland (both federal and state courts), the Washington D.C. area, and several other federal courts across the country.

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