LEGALcurrents®

Background
On June 22, 2020, the United States Supreme Court held in Liu v. Securities and Exchange Commission (“Liu”) that a disgorgement award which (i) does not exceed a wrongdoer’s net profits and (ii) is awarded for victims is permissible equitable relief available to the Securities and Exchange Commission (“SEC”) in sanctioning securities fraud in a civil case.

Liu centered around the SEC’s enforcement measures against defendants who solicited investors to invest in the construction of a cancer-treatment center and subsequently misappropriated much of the funds raised in the offering. In its civil case against the defendants, the SEC sought disgorgement in an amount equal to the full amount of investments the defendants had raised from the investors. The defendants argued that such disgorgement would constitute punitive enforcement unavailable to the SEC in a civil case. The Ninth Circuit Court of Appeals, in affirming a District Court’s decision, upheld the SEC’s disgorgement of the full amount.

The Supreme Court’s Decision
In vacating the Ninth Circuit’s decision, Justice Sonia Sotomayor, writing for eight of the Supreme Court’s nine justices, stated that courts have routinely deprived wrongdoers of their unlawful gains as an equitable remedy. However, the Supreme Court held the SEC’s disgorgement in civil cases must be limited to the wrongdoer’s net profits, as opposed to disgorging the full amount of investments raised without deducting legitimate expenses. Otherwise, the disgorgement would exceed the bounds of an equitable remedy and become a punitive remedy impermissible in a civil case.

Additionally, the Supreme Court held that any disgorgements must be awarded for victims. The SEC his historically deposited portions of disgorgement proceeds into the United States Treasury to assist with funding the activities of the Inspector General and whistleblower payments, and the SEC maintains that this practice may still be justified after Liu in instances where distributing the disgorged funds to investors would be infeasible. While the Supreme Court explicitly left open the question of whether this practice satisfies the SEC’s obligation to award disgorged funds for victims, it noted here that the SEC had not claimed such infeasibility in Liu.

Impact of the Decision
The Supreme Court’s decision will allow the SEC to continue seeking disgorgement as an equitable remedy in its civil enforcement actions to combat securities fraud, a tool the SEC believes is vital to its investor protection mission. However, the SEC may no longer seek disgorgement of the full amount of investments raised in a particular offering and the SEC must award the disgorged funds for the victims.

The Supreme Court’s opinion in Liu can be found at this link.


Attorney Advertising. Prior results do not guarantee a similar outcome. This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. ©2020 Harter Secrest & Emery LLP

Disclaimer

This website presents only general information not intended as legal advice. Although we encourage calls, letters and emails from prospective clients, please keep in mind that merely contacting Harter Secrest & Emery LLP (HSE) does not establish an attorney-client relationship between us. Confidential information should not be sent to HSE until you have been notified in writing by HSE that a formal attorney-client relationship has been established. Information sent to us before then may not be treated as confidential by HSE or the court.

I have read this and agree     Cancel

Our website uses cookies. By continuing to use our site, you agree to our use of cookies in accordance with our Privacy Policy.