United States Court Of Appeals For The Fifth Circuit Becomes First Circuit Court To Consider Post-Liu Disgorgement

• Published date: 14 January 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Trials & Appeals & Compensation, Securities
• Law Firm: Cahill Gordon & Reindel LLP
• Author: Mr Bradley J. Bondi, Joel Kurtzberg, Peter J. Linken and Zachary M. Missan

In SEC v. Blackburn, 15 F.4th 676 (5th Cir. Oct. 12, 2021),¹ the United States Court of Appeals for the Fifth Circuit became the first circuit to consider whether a disgorgement order for violations of the securities laws met the "awarded for victims" requirement set forth by the Supreme Court of the United States in Liu v. SEC, 140 S. Ct. 1936 (2020).² The Fifth Circuit affirmed the district court order awarding disgorgement and held that the award satisfied the requirements of Liu because the order required the Securities and Exchange Commission ("SEC") to disburse funds "to already-identified victims with court supervision to ensure compliance with that edict."³

I. SEC v. Liu: The "Awarded for Victims" Requirement for Disgorgement Orders

The Securities Exchange Act of 1934 permits the SEC to seek disgorgement as a means of "equitable relief . . . for the benefit of investors." 15 U. S. C. '78u(d)(5). In Liu, ⁴ the Supreme Court announced several limits to the SEC's disgorgement power. Addressing issues left unresolved by the Court's earlier decision in Kokesh v. SEC, 581 U.S. __, 137 S. Ct. 1635 (2017),⁵ the Court in Liu held that disgorgement is lawful under '78u(d)(5) where such relief "does not exceed a wrongdoer's net profits and is awarded for victims."⁶

The Supreme Court in Liu did not decide how a disgorgement remedy could satisfy the "awarded for victims" requirement. The Court explained, however, that the SEC cannot use the recovered profits for the benefit of the general public.⁷ The Court warned of several SEC disgorgement practices that "test the bounds of equity practice," including allocating funds specifically to the Treasury Department and imposing equal liability, i.e., joint and several liability, among defendants.⁸ While acknowledging the "considerable tension with equity practices" in the SEC's practice of allocating recovered proceeds to a Treasury fund when the SEC cannot feasibly distribute funds to victims, the Court did not reach the issue of whether the practice could continue.⁹ Instead, the Court left open this question for lower courts to determine the practice's "consisten[cy] with equitable principles."¹⁰

The Fifth Circuit's decision in Blackburn was the first from a court of appeals to address disgorgement postLiu.

II. Factual Background and Procedural History of SEC v. Blackburn

Treaty Energy Corporation ("Treaty"), a "penny stock" company traded in the over-the-counter market, operated in the oil and gas industry. In...