The Supreme Court has granted certiorari to decide whether the U.S. Securities and Exchange Commission can seek and obtain disgorgement from a court as a remedy for a securities violation. A decision that the SEC does not have disgorgement authority would have significant consequences for litigants.
In SEC v. Liu, a California District Court held that the defendants had defrauded Chinese individuals seeking to invest in a cancer treatment center to obtain visas under the EB-5 Immigrant Investor Program. Rather than obtaining the required permits, the defendants spent most of the money on marketing and their own salaries. The District Court ordered $8.2 million in civil penalties – an amount equal to the salaries – plus nearly $27 million in disgorgement, representing the total amount they raised from investors. The Ninth Circuit affirmed, relying on Ninth Circuit precedent for the disgorgement holding.
Although lower courts have regularly ordered disgorgement since the 1970 Southern District of New York case of SEC v. Texas Gulf Sulphur Co., the Supreme Court has never addressed directly whether disgorgement is an available remedy. In fact, in the 2017 case of Kokesh v. SEC, the Court explicitly left this question open (while at the same time holding that disgorgement actions are subject to a five-year statute of limitations). The Court will answer it in Liu.
A holding for the defendants would be a game changer in SEC enforcement law. According to the SEC’s 2019 annual report, it disgorged just over $3.2 billion in FY19, which accounted for approximately 75% of all money judgments it obtained. A victory for the defendants would thus radically curtail the SEC’s collection of money judgments, and in the process, likely change its approach to enforcement activities. It would also eliminate the most severe civil remedy the SEC can seek in many individual cases. Without the authority to seek disgorgement, the SEC could only obtain civil penalties, which, for most types of violations, are capped at the defendant’s gross pecuniary gain. In Liu, that was the $8.2 million the defendants took home as salaries. Discarding disgorgement would eliminate most of the damages the SEC could obtain in cases like Liu, where the defendants’ gross pecuniary gain is a small fraction of the violation’s value. For that reason, it would also weaken the SEC’s bargaining power in settlement negotiations.