Regular readers may recall my article, Kokesh Footnote 3 Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases, 56 Washington University Journal of Law & Policy 17 (2018), available at SSRN: https://ssrn.com/abstract=2992719, in which I argued that:
Disgorgement of ill-gotten gains long has been a basic tool in the Securities and Exchange Commission’s (SEC) penalty toolkit, despite a paucity of statutory authorization. Because disgorgement lacked a statutory framework, courts have had to flesh out the sanction via interstitial rulemaking. In Kokesh v. SEC, the US Supreme Court took up the seemingly technical—but surprisingly important—question of what statute of limitations applies to SEC disgorgement actions. More important, at least for present purposes, the Court’s opinion cast into doubt the validity of the seemingly well-established disgorgement sanction.
Earlier cases based the SEC’s authority to seek and the courts’ power to impose disgorgement on the claim that it is a form of equitable ancillary relief. If disgorgement is a penalty, however, courts lack that power and the SEC lacks that authority. This conclusion follows necessarily from the basic premise that there are no penalties in equity and the complete absence of any statutory authority to impose disgorgement as a legal sanction. Now that the Supreme Court has made clear that disgorgement is, in fact, a penalty, the future of the disgorgement penalty looks bleak.
Bloomberg Law is reporting that:
In an hour-long session in Washington Tuesday, the justices considered the SEC’s use of “disgorgement” to collect money from someone the commission sues in federal court. Disgorgement is distinct from fines and other penalties the SEC seeks, in part because it’s geared toward reimbursing victims.
The justices didn’t appear willing to altogether eliminate disgorgement, which opponents say the SEC is using as an illegal punishment. The argument suggested the court instead might bar the commission from collecting more than the amount of profit a defendant gained through fraud. The justices also indicated they might require the agency to return more money to harmed investors.
The WSJ is reporting that:
U.S. Supreme Court justices Tuesday indicated they may be inclined to rein in how courts and regulators order wrongdoers to return money earned through illegal investment schemes.
In arguments, liberal and conservative justices questioned how they could narrow the remedy without quashing it outright, an alternative they appeared to reject. ...
Challengers say courts lack express authority from Congress to order the punishment, which is known as disgorgement. The critics also argue the SEC sometimes fails to return the money to investors, making the payments look more like a penalty that would require explicit congressional authority.
Justices on Tuesday appeared to dwell less on those questions and more on how disgorgement fits within an area of law that corrects the harm from misdeeds and makes victims whole.
“Would the government have any difficulty with a rule that the money should be returned to investors where feasible?” asked Justice Neil Gorsuch. The more liberal Justice Elena Kagan posed a similar question, as did other justices.
This strikes me as very odd. On what conceivable basis should the validity of the disgorgement remedy turn on whether the government works harder at paying recoveries over to investors? Especially when there is a private right of action available in most cases for defrauded investors to sue to recover their losses?
Once again, I suspect those of us who work in the securities regulation vein will end up being appalled by a Supreme Court decision, no matter how it comes out on the merits. As Mitu Gulati and I wrote a while back:
There is general agreement that the Supreme Court has not done a very good job in the securities area, especially in recent years. Scholars operating in a wide range of paradigms have criticized the court’s recent securities opinions. Supreme Court securities law decisions typically lack a broad, consistent understanding of the relevant public policy considerations. Worse yet, they frequently lack such basics as doctrinal coherence and fidelity to prior opinions.
Why doesn’t the Supreme Court do a better job in securities cases? Our model offers an answer. When deciding securities cases, the Court is faced with hard, dry, and highly technical issues. Supreme Court justices and their clerks arrive on the court with little expertise in securities law. One reasonably assumes that neither the justices nor their clerks have much interest developing substantial institutional expertise in this area after they arrive. (Former Justice Powell being the exception that proves these rules.) Accordingly, it would be surprising if the Court’s securities opinions exhibited anything remotely resembling expert craftsmanship.
Under such conditions, we would expect the justices to take securities cases rarely, typically when there is a serious circuit split, which is in fact what we observe. When obliged to take a securities issue, the Court will seek to minimize the amount of effort required to render a decision. This observation is not intended pejoratively. To the contrary, in terms of our model, the justices are acting rationally. …
Bounded rationality implies that Supreme Court justices (and their clerks) have a limited ability to master legal information, including the myriad complexities of doctrine and policy in the host of areas annually presented to the court. Specialization is a rational response to bounded rationality—the expert in a field makes the most of his limited capacity to absorb and master information by limiting the amount of information that must be processed by limiting the breadth of the field in which he develops expertise. Supreme Court justices will therefore need to specialize, just as experts in other fields must do. Specializing in securities law would not be rational. The psychic rewards of being a justice—present day celebrity and historical fame—are associated with decisions on great constitutional issues, not the minutiae of securities regulation.