The Situation: The U.S. Supreme Court has granted certiorari to consider whether the Securities and Exchange Commission ("SEC") has authority to obtain disgorgement in district court actions.
The Significance: The SEC obtains billions of dollars in disgorgement each year. An adverse ruling from the Supreme Court will cut off one of the SEC's most important remedies for securities violations.
Looking Ahead: Because no court of appeals has ever held that the SEC lacks authority to obtain disgorgement in district court, the Supreme Court's grant of certiorari may indicate strong skepticism about the SEC's power to do so. In response to the grant itself, the SEC may begin to bring more enforcement actions as administrative proceedings, where it has explicit statutory authority to seek disgorgement, and urge Congress to expressly give it the power to obtain disgorgement in district court.
The Supreme Court is reviewing one of the most important and long-standing tools used by the Securities and Exchange Commission ("SEC"). On November 1, 2019, the Court granted certiorari in Liu v. Securities and Exchange Commission, No. 18-1501, in which petitioners challenge the SEC's authority to obtain disgorgement in district court as a remedy for securities violations. Since 2015, the SEC has obtained more than $2.5 billion annually in disgorgement. If the Court rules in favor of petitioners, it would mark one of the most significant limitations ever placed on the SEC's enforcement powers.
For nearly five decades, courts of appeals have affirmed disgorgement pursuant to the SEC's authority to seek equitable relief. Following that precedent, the Ninth Circuit in Liu upheld the district court's disgorgement order of more than $26 million, representing the amount of funds petitioners raised from investors as part of a fraudulent scheme. There is no split of authority in the courts of appeals on the issue; indeed, no court of appeals has held that the SEC lacks authority to obtain disgorgement.
In seeking certiorari, petitioners contended that under the Supreme Court's reasoning in Kokesh v. SEC, 137 S. Ct. 1635 (2017), the SEC lacks the power to obtain such disgorgement. In Kokesh, the Court determined that SEC disgorgement constitutes a penalty for the purposes of the applicable statute of limitations because it is imposed for violations of public law and serves punitive purposes. At oral argument, five Justices questioned the SEC's statutory authority for disgorgement. Nevertheless, the Court in Kokesh cautioned that its decision should not be interpreted "as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings."
Petitioners in Liu argue that if SEC disgorgement is a penalty, it cannot be ordered as an equitable remedy, because equitable relief aims to restore the status quo, while penalties seek to punish the wrongdoer. They point out that many disgorgement awards end up in the U.S. Treasury, not the hands of the victims, and claim that such awards often leave defendants worse off than before their unlawful conduct.
In opposing certiorari, the SEC responded that disgorgement can be both a penalty and an equitable remedy; the former does not preclude the latter. The SEC also argues that Congress authorized "equitable relief" against a background in which the Supreme Court characterized disgorgement as an equitable remedy, and that Congress has enacted statutes that presuppose the availability of disgorgement as an equitable remedy in SEC enforcement actions.
A ruling adverse to the SEC would end disgorgement in both settlements and litigation filed in district court. Even prior to a ruling, the Court's consideration of the SEC's authority may lead the SEC to bring more enforcement actions as administrative proceedings, where the SEC has express statutory authority to seek disgorgement, rather than in district court. Liu may also have consequences that reach beyond SEC enforcement. Nearly 100 statutes allow courts to fashion relief through their equitable powers, and the SEC is not the only agency to rely on those powers to seek disgorgement.
Merits briefing and oral argument will occur during the current Term, with a decision expected by June 2020.
Three Key Takeaways
- A ruling against the SEC would end the SEC's ability to seek disgorgement in district court litigation and settlements filed in district court. But the SEC would still be able to pursue civil monetary penalties in district court and penalties and disgorgement in administrative proceedings.
- Even if the Supreme Court rules that the SEC does not currently have authority to obtain disgorgement in district court, Congress could pass legislation restoring the SEC's power to do so.
- Because the SEC is not the only agency to rely on equitable powers to seek disgorgement, a ruling against the SEC could have significant consequences for other agency enforcement actions.
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