Michael D. Birnbaum, Jina Choi, Jordan Eth, and Joel C. Haims
Securities Enforcement and Securities Litigation
On November 1, 2019, the United States Supreme Court granted a writ of certiorari in Liu v. SEC, No. 18-1501, to address whether the Securities and Exchange Commission may obtain disgorgement in civil injunctive actions filed in federal court. How the Court resolves this question may have an enormous impact on not only the SEC’s enforcement program—which, according to its own public statements, obtained more than $2.5 billion in disgorgement awards in 2018 alone—but also on a wide array of other federal regulators that rely on courts invoking similar equitable authority to fashion remedies.
Barely two years have passed since the Supreme Court held in Kokesh v. SEC that the SEC’s ability to pursue disgorgement is subject to statutes of limitations because disgorgement operates as a penalty. The Kokesh Court was careful to note that its decision should not “be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings.” Accordingly, courts since Kokesh have generally continued to include disgorgement in the remedies they grant in SEC cases, relying on pre-Kokesh precedent.
The Ninth Circuit Court of Appeals was among those courts relying on older precedent in deciding Liu. Defendants in Liu raised nearly $27 million through a securities offering and, upon a finding of a violation of Section 17(a)(2) of the Securities Act of 1933, were ordered to disgorge all proceeds raised in that offering. In addition to arguing that the district court was not authorized to order disgorgement as a general matter, defendants contended that any award should be reduced by at least the $16 million they claimed to have spent on their project—i.e., the award should target profits, not proceeds.
The Ninth Circuit, in addressing Liu’s argument that that the district court “lacked statutory authority to award disgorgement,” noted that the Supreme Court in Kokesh expressly declined to address whether courts’ equitable authority in SEC matters includes the power to award disgorgement. Accordingly, the court followed pre-Kokesh authority to affirm. In granting certiorari in Liu,the Supreme Court has now accepted the question it declined to address in Kokesh.
Congress has authorized the SEC to seek injunctions, certain monetary penalties, and equitable relief in civil injunctive actions. Petitioners do not challenge the SEC’s authority to obtain monetary penalties, which are subject to rules regarding the amounts and circumstances under which penalties are appropriate, but object to what they argue is an unauthorized additional penalty often granted under the guise of courts’ equitable authority. Petitioners argue that equitable relief is intended to restore parties to the status quo, and disgorgement—particularly where it extends to proceeds of an alleged securities violation in excess of ill-gotten profits—goes beyond equitable relief and is more appropriately considered punitive.
The U.S. government initially waived its right to respond to Liu’s petition for certiorari, only opting to do so when the Supreme Court requested a response. In its submission, the government questioned why disgorgement cannot be punitive—at least as the Kokesh Court used that term—and still be an appropriate form of equitable relief, arguing that a remedy can “qualify as a form of equitable relief even though it might also be considered ‘penal’ for some purposes.” This argument is consistent with the approach taken by several courts since Kokesh, such as the Second Circuit Court of Appeals, which affirmed a disgorgement order even while assuming that, under Kokesh, the disgorgement at issue was “essentially punitive in nature.”
The government further argued that judicial authority to order disgorgement of ill-gotten gains comes from two sources. First, the power to “enjoin” violations set forth in the Securities Act of 1933 and the Securities Exchange Act of 1934, based on pre-Kokesh Supreme Court precedent, included the power to “disgorge profits … acquired in violation” of relevant statutory provisions. Second, that the Sarbanes-Oxley Act of 2002 assumed the viability of disgorgement awards when it authorized civil penalties to be added to “disgorgement fund[s]” and authorized courts in SEC actions to order “any equitable relief that may be appropriate or necessary for the benefit of investors.” There again, the government pointed to pre-Kokesh precedent describing disgorgement as one of the remedies available pursuant to the courts’ equitable authority.
While some concurring and dissenting opinions in various courts of appeals have questioned whether, in the wake of Kokesh, disgorgement awards are appropriate invocations of courts’ equitable authority, there does not appear to be the kind of true circuit split that would ordinarily command the Supreme Court’s attention. The Court’s grant of certiorari here, so soon after deciding Kokesh, suggests that the Court has more to say on this issue.
How the Supreme Court decides Liu v. SEC will affect the SEC’s and other regulators’ ability to pursue billions of dollars in what has traditionally been a standard form of equitable relief that courts have routinely awarded. Liu presents the Court with an opportunity to clarify whether courts are ever authorized to award disgorgement and, if so, whether there are limitations on when disgorgement is appropriate, such as when an award is a means to restoring the status quo rather than an additional penalty for parties that are already subject to statutory civil monetary penalties.
Any individual or entity facing litigation or considering a settlement with the SEC or another regulator that traditionally seeks disgorgement as equitable relief should consider the possibility that the Supreme Court might find disgorgement beyond the federal courts’ equitable authority.
 Kokesh v. SEC, 137 S. Ct. 1635, 1642, n.3 (2017).
 The SEC has the express authority to pursue disgorgement in administrative proceedings. Since the Supreme Court’s holding last year that the SEC’s use of administrative law judges violated the Appointments Clause of the U.S. Constitution [Read], the Commission has been reluctant to pursue contested cases in that forum.
 SEC v. Metter, 706 F. App’x 699, 702 (2d Cir. 2017).
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