On March 3, 2020, the U.S. Supreme Court heard argument in Liu v. Securities and Exchange Commission, a case about whether disgorgement is an available remedy in SEC enforcement actions filed in federal court under a provision of the Securities Exchange Act of 1934 permitting the SEC to pursue, and federal courts to grant, “any equitable relief that may be appropriate or necessary for the benefit of investors.” The SEC has long wielded the potent power to seek disgorgement of profits from civil defendants in these actions, but in this case the Supreme Court is considering whether, and to what extent, the SEC has authority to do so.
The petitioner’s argument in the case is two-fold. First, the petitioner argues that securities laws are quite detailed and specify the forms of relief available; disgorgement is specified as a form of relief available in administrative proceedings, but not in judicial proceedings, and the Court should not construe “equitable relief” to broadly include a form of relief that is not specified expressly. Second, the petitioner points to the Supreme Court’s 2017 decision in Kokesh v. SEC, in which the Court held that SEC disgorgement is a “penalty” for purposes of construing a statute of limitations provision. The petitioner argues that Kokesh provides a further reason for not permitting the SEC to obtain disgorgement, because the purpose of equitable relief is compensatory—to restore the status quo, not to punish a wrongdoer or deter violations of the securities laws, as the Court described disgorgement in Kokesh. The SEC, for its part, takes the position that disgorgement has long been understood to be an “equitable” remedy, whether it is compensatory or punitive, and so it squarely falls within the “any equitable relief that may be appropriate” provision.
At yesterday’s argument, the Court seemed disinclined to wholly adopt either party’s view. Instead, the Court seemed to lean on a position advanced in an amicus brief filed by a group of law professors and scholars in the areas of restitution and remedies laws. These professors argued that disgorgement of profits is “equitable relief” available to the SEC in judicial actions, but that it is not so broad a remedy as the SEC would argue, because it does not include “gross receipts” or “gross profits” and does not authorize joint-and-several liability. Several Justices (including Justices Alito, Kagan, Sotomayor, Kavanaugh, and Gorsuch) suggested that a reasonable interpretation of the “any equitable relief” provision would be to permit disgorgement limited to (a) relief that is returned to victims or investors (rather than retained by the government), and (b) the “net profits” enjoyed by defendants.
Even if the Court adopts this Goldilocks position, there are several outstanding questions that the argument did not shed much light on, such as whether liability must be defendant-specific, rather than joint and several; how net profits should be calculated; what types of expenditures are included in the “net profits” measure; and what happens with respect to violations for which there may be no identifiable victim (e.g., violations of the Foreign Corrupt Practices Act, which came up several times during the argument). The Justices may hammer out some of these details during conference, or they may save them for another case. In either event, defendants in SEC enforcement actions would be well served to preserve any arguments they may have about the propriety of disgorgement, as it seems likely that the Court will place some meaningful limitations on disgorgement relief the SEC can obtain.