The Congressional Research Service ("CRS") examined the potential implications of the Supreme Court limiting, or eliminating, the SEC's use of disgorgement to recover money from violators of federal securities laws in Liu v. SEC. In that case, which is currently pending in the Supreme Court, Liu argued that disgorgement as used by the SEC in its enforcement actions is not an equitable remedy and, therefore, the SEC does not have the authority under the federal securities laws to obtain disgorgement in federal court actions.
In the report, the CRS provided an overview of the history of the SEC's use of disgorgement in enforcement actions. The CRS considered how an adverse ruling by the Supreme Court in Liu v. SEC would affect the SEC, noting that Liu demonstrates how the SEC can collect more money in disgorgement than in civil penalties in a given case. The CRS discussed several "substantial procedural and evidentiary advantages" that disgorgement provides to the SEC as opposed to civil monetary penalties, such as being able to (i) try cases before a judge instead of a jury, (ii) submit only a "reasonable approximation" of funds for disgorgement, and (iii) use contempt sanctions to enforce disgorgement orders.
The CRS also reported opposing viewpoints from other commenters stating that limiting disgorgement would not have a material impact on the SEC, mainly because the agency could make up for the loss of disgorgement with civil money penalties and/or bring more cases in administrative proceedings where the SEC has statutory authorization to seek disgorgement.
The CRS further noted that the implications of Liu could extend beyond the SEC. A number of other agencies routinely seek disgorgement or similar relief, including the CFTC and the CFPB. If the Supreme Court rules against the SEC in Liu, it could limit these agencies' ability to obtain similar relief.
Finally, the CRS pointed out that Congress is free to pass legislation clarifying that the SEC has the authority to seek disgorgement in its enforcement actions and cited the Investor Protection and Capital Markets Fairness Act, which passed the House of Representatives in 2017, as an example.
Commentary Kyle DeYoung
There is little doubt that a loss in the Liu case would have a significant impact on the SEC's enforcement program. As previously discussed, the SEC routinely seeks disgorgement in its federal court actions and obtains significantly more in orders for disgorgement than it does in civil penalties. While it could mitigate the impact by seeking higher penalties and bringing more cases as administrative proceedings, neither is an adequate substitute for disgorgement from the SEC's perspective. As discussed in the CRS' report, there are procedural and evidentiary advantages the SEC has when it seeks disgorgement that are not available for civil money penalties. And while disgorgement is statutorily authorized in administrative proceedings, there are some cases the SEC can't bring in administrative proceedings (e.g., the SEC can bring control person liability cases only in federal court and it can obtain emergency relief, such as TROs and asset freezes, only in federal court because this relief is not available in administrative proceedings) and an increase in contested administrative proceedings would likely subject the SEC to additional criticism about the fairness of these proceedings.
On the legislative front, it appears that Congress will wait to see what the Supreme Court does in Liu before passing any legislation that would clarify the SEC's authority to obtain disgorgement in federal court actions. While this is an issue that has some bipartisan support and a number of bills have been introduced that would provide the SEC with statutory authorization, none of them has had enough momentum to make it through. Part of the reason for this failure may be that most of these proposals don't just clarify the SEC's authority to obtain disgorgement but they include other more controversial reforms as well. For example, the bill mentioned in the CRS' report, the Investor Protection and Capital Market Fairness Act, would have explicitly granted the SEC authority to seek disgorgement (and injunctions) in federal court actions, but it also increased the statute of limitations for these claims to 14 years from 5 years as determined in Kokesh — a change that has far less bipartisan support. It is somewhat of a surprise that the uncertainty caused by the Supreme Court's granting of certiorari in Liu has not led to more of a legislative response. Perhaps a decision taking away the SEC's ability to make wrongdoers pay back ill-gotten gains will spur Congress into action.
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