By an 8-1 vote (with Justice Thomas dissenting), the Supreme Court in an opinion by Justice Sotomayor upheld--while limiting--the SEC's power to seek disgorgement in fraud cases. (For prior coverage see this post.)
Sotomayor sets the stage as follows:
In civil actions, the SEC can seek civil penalties and “equitable relief.” See, e.g., §78u(d)(5) (“In any action or proceeding brought or instituted by the Commission under any provision of the securities laws, . . . any Federal court may grant . . . any equitable relief that may be appropriate or necessary for the benefit of investors”); see also §78u(d)(3) (“Money penalties in civil actions” (quotation modified)).
Congress did not define what falls under the umbrella of “equitable relief.” Thus, courts have had to consider which remedies the SEC may impose as part of its §78u(d)(5) powers.
Starting with SEC v. Texas Gulf Sulphur Co., 446 F. 2d 1301 (CA2 1971), courts determined that the SEC had authority to obtain what it called “restitution,” and what in substance amounted to “profits” that “merely depriv[e]” a defendant of “the gains of . . . wrongful conduct.” Id., at 1307–1308. Over the years, the SEC has continued to request this remedy, later referred to as “disgorgement,” and courts have continued to award it. ...
In Kokesh, this Court determined that disgorgement constituted a “penalty” for the purposes of 28 U. S. C. §2462, which establishes a 5-year statute of limitations for “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.” ... But the Court did not address whether a §2462 penalty can nevertheless qualify as “equitable relief ” under §78u(d)(5), given that equity never “lends its aid to enforce a forfeiture or penalty.” Marshall v. Vicksburg, 15 Wall. 146, 149 (1873). The Court cautioned, moreover, that its decision should not be interpreted “as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings.” Kokesh, 581 U. S., at ___, n. 3 (slip op., at 5, n. 3). This question is now squarely before the Court.
Sotomayor began her analysis by explaining that:
In interpreting statutes like §78u(d)(5) that provide for “equitable relief,” this Court an- alyzes whether a particular remedy falls into “those categories of relief that were typically available in equity.”
She then goes on to claim that various remedies available at equity resembled disgorgement. The problem with that argument, of course, is that the SCOTUS in Kokesh itself had acknowledged that disgorgement is a relatively new penalty that was created by judicial fiat at SEC’s behest:
Initially, the only statutory remedy available to the SEC in an enforcement action was an injunction barring future violations of securities laws. … In the absence of statutory authorization for monetary remedies, the Commission urged courts to order disgorgement as an exercise of their “inherent equity power to grant relief ancillary to an injunction.”
Sotomayor later argues that:
In Tull v. United States, 481 U. S. 412 (1987), the Court described “disgorgement of improper profits” as “traditionally considered an equitable remedy.”
But so what? As I explained in my article Kokesh Footnote 3 Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases:
There is general agreement that the penalty phase of Texas Gulf Sulphur was the first time a court determined that the SEC had authority to seek disgorgement of a defendant’s ill-gotten gains.
As I further explained in that article, "all of the Court’s arguments about the nature of disgorgement apply with equal force to the issue of SEC authority and judicial power as they do to that of statutes of limitation. Disgorgement as practiced in SEC proceedings acts as a punitive sanction intended to deter, regardless of whether we are considering applicable statutes of limitation or the authority and power issues."
Sotomayor tried to avoid this problem by equating disgorgement with various equitable remedies that did exist in 1789. She compared it to an accounting, for example. But the analogy does not hold water. Accounting was a remedy only available against persons who has breached a fiduciary duty and cannot be ordered against a mere wrongdoer.
She also equated disgorgement to restitution. Yet, again, the analogy is flawed. Restitution is a generic term that can be characterized as legal or equitable depending on the nature of the claim and the relief being sought. As a result, as Francesco A. DeLuca has commented, "the analogy to ‘restitution’ is circular and unhelpful.”
In sum, I find Sotomayor's argument utterly unpersuasive.
Having erroneously preserved disgorgement, she did at least try taming it.
- Because the statute authorizing the SEC to pursue equitable remedies requires any remedy be “appropriate or necessary for the benefit of investors,” and the equitable nature of the profits remedy generally requires the SEC to return a defendant’s gains to wronged investors. Accordingly, without so deciding, she cast doubt on whether disgorgement orders requiring that the defendant pay sums over to the US Treasury are valid. Disgorgement “must do more than simply benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains,” she wrote.
- Courts must deduct legitimate expenses before awarding disgorgement.
For discussion of Liu, see Ronald Mann's analysis at SCOTUSblog. As he explains:
Two threads dominate her reasoning. One is that the remedy must be “tethered to a wrongdoer’s net unlawful profits,” ensuring that the wrongdoer “should not be punished by” (in the words of another 19th century opinion) “‘pay[ing] more than a fair compensation to the person wronged.’” The second is the “‘protean character’ of the profits-recovery remedy,’” which the court has sometimes compared to restitution and at other times to an accounting for profits. In her view, though, even if the label of disgorgement is relatively new, the body of authority establishes that “equity courts habitually [have] awarded profits-based remedies” as a matter of general first principles of equity.
He also points out that:
The closing section of the opinion points out that the SEC’s pursuit of disgorgement in general, and arguably in this case, has transgressed each of [the limits she imposes in this opinion]. Sotomayor notes that the SEC “does not always return the entirety of disgorgement proceeds to investors, instead depositing a portion of its collections in a fund in the Treasury.” ...
Similarly, the opinion criticizes the SEC’s common imposition of “joint-and-several liability” in disgorgement cases, which Sotomayor finds to be “at odds with the common-law rule requiring individual liability for wrongful profits” because it “could transform any equitable profits-focused remedy into a penalty.” ...
Finally, Sotomayor flatly rejects the practice (followed by the lower court here) of ordering disgorgement of all revenues, explaining that “courts must deduct legitimate expenses before ordering disgorgement.”
