Earlier this week, a near-unanimous[1] United States Supreme Court issued its much anticipated ruling on the SEC’s ability to obtain disgorgement of ill-gotten gains in cases involving securities fraud, FCPA violations, and other securities violations.[2]  Justice Sotomayor, writing for the majority, confirmed in Liu v. SEC[3] that the SEC has the authority to obtain such relief.  The SEC’s authority to obtain disgorgement had seldom been questioned until the Supreme Court itself raised the issue in a footnote in its landmark Kokesh v. SEC decision in 2017.[4]

In Kokesh, the Court held that disgorgement of ill-gotten gains was punitive in nature and therefore subject to the five-year statute of limitations for “penalties, fines and forfeitures” in 28 U.S.C. § 2642.  If disgorgement is punitive, how can it constitute an equitable remedy designed to restore the status quo?  That was the essential question presented in Liu.

The Court in Liu held that a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims constitutes equitable relief permissible under 15 U.S.C. § 78u(d)(5).  In reaching this conclusion, the Court framed the question as whether disgorgement is a remedy “typically available in equity.”

The Court noted that courts of equity “have long authorized courts to strip wrongdoers of their ill-gotten gains.”  To avoid moving the deprivation of ill-gotten gains outside equitable relief and into the category of a penalty, “courts restricted it to an individual wrongdoer’s net profits to be awarded for victims.”

The Court noted that disgorgement is a relatively recent term for this remedy.  It has also been described as a form of restitution or an accounting.[5]  But whatever its name, the Court reasoned, this remedy has long been recognized as a one “typically available in equity.”  (A rose by any other name would smell as sweet.).
Continue Reading Supreme Court Affirms SEC’s Authority to Obtain Disgorgement, But Recognizes Limits on Such Relief