U.S. Supreme Court Preserves SEC’s Disgorgement Power—With Limits

On Monday, the U.S. Supreme Court preserved the U.S. Securities and Exchange Commission’s (“SEC”) ability to seek disgorgement as equitable relief for a securities law violation in federal court. However, the Supreme Court noted an important limit to the SEC’s power—the money must be used to reimburse defrauded investors and cannot exceed the wrongdoer’s net profits. The court ruled that an order of disgorgement cannot include the legitimate expenses of a defendant associated with the transaction at issue. An example would be the business expenses a company that obtained a contract through bribery incurred as it provided goods or services under that contract.

The 8-1 holding in favor of the SEC was not unsurprising, and in fact, we discussed the likelihood of this result in a prior alert. The ruling is significant, in part, because of the enormous amount of disgorgement the SEC recovers—typically more than $1 billion every year. A contrary result would have dealt a significant blow to one of the SEC’s most favored remedies. Despite preserving the SEC’s authority, the Supreme Court also provided defendants with some new arguments to raise when challenging future disgorgement awards. Any award must now do more than benefit the public at large; it must go to wronged investors.

The case is Liu et al. v. U.S. Securities & Exchange Commission, and the Supreme Court’s opinion is available here.

For more information, contact Matt Fornshell, Tim Belevetz, Meredith Wood or another member of our Securities Litigation and Regulation Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.