Disgorgement's Role In SEC Enforcement Actions: An Analysis Of The Supreme Court's Decision In Liu V. SEC

• Published date: 25 June 2020
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Trials & Appeals & Compensation, Securities
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Mr Kyle DeYoung, Lex Urban and Wesley Wintermyer

On June 22, 2020, the U.S. Supreme Court threw the SEC a lifeline in the highly-anticipated decision of Liu v. SEC. In an 8-to-1 decision, the Justices held that the SEC may continue to obtain disgorgement in federal court, albeit in a significantly narrowed fashion.

Although the SEC has routinely sought, and often secured, disgorgement as a form of "equitable relief" in federal courts since the 1970's, commentators questioned this practice, as the SEC's authorizing statutes do not list disgorgement as an available judicial remedy. The issue came to the fore in June 2017, when the Supreme Court decided Kokesh v. SEC,¹ in which the Justices reasoned that disgorgement was a "penalty" subject to a five-year statute of limitations. In an attention-grabbing footnote, the Court stressed that it was not passing judgment on "whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context."² Many commentators read this to signal the Court's willingness to consider the unresolved question of the SEC's disgorgement authority. Liu v. SEC presented that opportunity. The Court upheld disgorgement as an available remedy, but held that disgorgement awards must be limited to wrongdoers' net profits as opposed to their gross illicit gains. The Court also cast doubt on whether the SEC may obtain disgorgement in cases were funds will be remitted to the U.S. Treasury as opposed to returned to identifiable victims.

This article analyzes the history of disgorgement prior to Kokesh and Liu, followed by an analysis of those decisions and the potential impact of Liu on future SEC enforcement.

A. Disgorgement's Role in SEC Enforcement

The SEC has express statutory authority to obtain "disgorgement" in enforcement proceedings it brings before its administrative law judges (ALJs). Congress granted the SEC this authority in the Remedies Act of 1990, which expanded the SEC's administrative enforcement powers to include "an order requiring accounting and disgorgement, including reasonable interest."³

In contrast, the federal securities laws do not explicitly grant the SEC authority to seek disgorgement in federal court. Rather, the statutes generally provide that the SEC may ask courts for "any equitable relief that may be appropriate or necessary for the benefit of investors."⁴ The SEC has traditionally sought, and courts have awarded, disgorgement as an equitable remedy.

Regardless of the forum, disgorgement plays a large role in the SEC's enforcement priorities. In the last three years, the SEC obtained disgorgement awards totaling $2.9 billion (2017), $2.5 billion (2018), and $3.2 billion (2019).⁵ Those figures eclipsed other monetary penalties secured by the SEC, which totaled $832 million (2017), $1.4 billion (2018), and $1.1 (2019).⁶

B. Kokesh v. SEC

The Supreme Court's June 2017 decision in Kokesh raised a hurdle to the SEC's reliance on disgorgement as a cornerstone remedy.⁷ Given that the SEC used disgorgement to redress public wrongs and as general deterrence, the Court held that disgorgement was a "penalty" and thus subject to a five-year statute of limitations for penalties. After the decision, the SEC reported that application of the five-year statute of limitations was significant "as many securities frauds are complex, well concealed, and are not discovered until investors have been victimized over many years."⁸ The SEC Enforcement Division's annual report estimated that the decision required the agency to forego disgorgement of approximately $900...