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E-MailThis post is based on an Amici Curiae Brief to the U.S. Supreme Court. Daniel Chiplock is a partner at Lieff Cabraser Heimann & Bernstein, LLP, and assisted in drafting the brief by former SEC Commissioners and staff. Tyler Gellasch is the Executive Director of Healthy Markets Association and Andy Green is the Managing Director for Economic Policy of the Center for American Progress. Gellasch and Green joined the brief as former SEC officials.
This March, the Supreme Court is set to hear oral argument on whether the SEC may continue seeking “disgorgement”—or the giving-up of all ill-gotten gains—in civil enforcement proceedings brought in federal court. The SEC has long taken the view that wrongdoers should not be permitted to reap the benefits from their misconduct. And while stark political differences have emerged over the SEC’s imposition of corporate penalties in recent years, the SEC’s ability to seek disgorgement has generally gone unquestioned.
Not anymore.
In Liu v. SEC, the Petitioners before the Supreme Court are arguing that the SEC does not actually have the power to seek disgorgement at all in civil enforcement proceedings. At the district court, the Petitioners were found to have operated a fraudulent enterprise that bilked foreign investors out of tens of millions of dollars. The district court ordered that they “disgorge” the entirety of the proceeds they had obtained, even though they claimed to have used some of the proceeds to cover legitimate business and operational expenses.
Petitioners are nearly exclusively relying on the Supreme Court’s 2017 ruling in Kokesh v. SEC, where the Court—in a 9-0 decision—ruled that disgorgement, though traditionally viewed as an equitable remedy, operates as a “penalty” at least for purposes of triggering the SEC’s general 5-year statute of limitations. While the House of Representatives has subsequently passed legislation to “restore” the traditional view of disgorgement as not a penalty and extend the statute of limitations (by a 314-95 vote), that legislation has not yet become law. In the interim, Petitioners are now asserting that (1) Kokesh requires that disgorgement must be considered a penalty, and (2) that the “penalty” was not expressly authorized by Congress.
Prior to the Court’s decision in Kokesh, the SEC had maintained—and courts had generally agreed—that disgorgement was not a punitive remedy, but instead well within a court’s equitable power to award, because it seeks only to (1) return a defendant to the status quo ante, and (2) ensure that a defendant does not profit from his or her illegal activity. The statutory language and jurisprudence authorizing courts to award disgorgement had, put simply, never been seriously challenged.
Given that the Supreme Court has taken up the case, the stakes for the SEC and our financial markets are high. If the Court extends the application of its decision in Kokesh, the SEC could be deprived of one of its major enforcement tools in federal court.
Quite simply, those who violate the federal securities laws may be able to do so and not be forced to account for all of their illicit proceeds. That could remove a significant deterrent to misconduct. The government generally wouldn’t let a bank robber keep a portion of what they stole, and whether the robber spent some of the money on other activities or directed it to third parties would be irrelevant. But that could be the case if, instead of bank robbery, our wrongdoer engages in securities fraud, and the SEC seeks to hold him to account in federal court.
Eight former SEC Commissioners and senior staff filed a brief as amici curiae in support of the SEC and the continued availability and use of disgorgement as a remedy in SEC civil enforcement proceedings. The amici include former SEC Commissioners Luis Aguilar, Roel Campos, Roberta Karmel, and Bevis Longstreth, and they are joined by former staff Andy Green, Tyler Gellasch, Walter Jospin and Jordan Thomas. Amici argue that disgorgement remains a limited remedy, necessarily constrained by the facts and evidence presented to the court sitting in equity, and that regardless of how it may be characterized, it is not designed to “punish” but rather simply to ensure that defendants do not profit from their wrongdoing. Disgorgement, the amici argue, accordingly remains a necessary enforcement tool that is, in effect, the barest form of deterrent to securities fraud—as evidenced by Congress’ passage of monetary penalties meant to further bolster the SEC’s enforcement power beyond disgorgement. Whatever power disgorgement alone may have as a deterrent to securities law violations, the amici argue, should not be cited as a reason for eliminating it as an enforcement tool in SEC civil enforcement proceedings. The brief submitted by former SEC Commissioners and staff may be found here.
To view all of the briefs filed in the case, please look here.
Oral argument is set for March 3, 2020.
