In one of its last opinions to be released this Term, the United States Supreme Court issued a decision today in Liu v. Securities and Exchange Commission, a case about whether and to what extent disgorgement is an available remedy in SEC enforcement actions under the SEC’s statutory power to obtain “any equitable relief that may be appropriate or necessary for the benefit of investors.” 15 U.S.C. § 78u(d)(5). Goodwin provided an analysis of the oral argument in Liu in a March 4, 2020 Client Alert and indicated that the Court appeared disinclined to adopt either of the all-or-nothing arguments advanced by the parties – i.e., a finding that disgorgement is either always or never permitted – and instead seemed inclined to take a middle ground approach that would uphold but limit the SEC’s ability to seek disgorgement in enforcement actions. That is exactly what the Court’s opinion today does.
Justice Sotomayor, writing for every Justice except Justice Thomas (who would have held that disgorgement “can never be awarded under 15 U. S. C. §78u(d)(5)”), delivered the Court’s opinion, which holds that “a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible” under federal law. But the Court declined to hold whether a disgorgement award that falls short of that standard – for example, a disgorgement award that is deposited into the Treasury rather than awarded to victims, or a disgorgement award based on principles of joint-and-several liability – could also qualify. Instead, the Court left those key questions for lower courts to decide in the first instance and remanded the case for the courts below to determine whether the award sought was “consistent with equitable principles.”
The Court did, however, provide some general guidance for lower courts to consider as they fashion disgorgement awards in SEC enforcement actions (and a roadmap for defendants who may wish to challenge SEC disgorgement requests in the future). First, the Court stated that the equitable remedy of disgorgement “generally requires the SEC to return a defendant’s gains to wronged investors for their benefit.” And although the Court’s opinion did not foreclose the possibility that disgorgement awards that are not provided to victims might in some instances constitute equitable relief, it cautioned that such a remedy “must do more than simply benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains.”
Second, the Court’s opinion similarly did not rule out the possibility that joint-and-several liability might be appropriate in some cases. But it noted that such a rule seemed generally at odds with the common-law tradition “requiring individual liability for wrongful profits,” and it spoke critically about the SEC’s practice of imposing disgorgement liability on defendants for benefits that accrue to others, which the Court said “could transform any equitable profits-focused remedy into a penalty.”
Finally, the Court’s opinion explained that, in general, courts must deduct “legitimate expenses” before awarding disgorgement (unless the entire profit of the business at issue resulted from the wrongdoing). But it left the details for future courts here too – the Court did not address what deductions are (or are not) appropriate for purposes of calculating net profits.
These issues will likely remain percolating in the lower courts – including in the remanded decision in Liu itself – and will likely reach the Supreme Court again in the coming years. At minimum, however, the Supreme Court’s decision makes clear that “traditional equitable principles” should be the guiding light for lower courts to follow as they consider these questions, and not the SEC’s more expansive longstanding practices.