On June 22, 2020, the U.S. Supreme Court in Liu v. SEC upheld the SEC’s ability to obtain disgorgement under 15 U.S.C. § 78u(d)(5), which authorizes the SEC to seek “equitable relief” in civil proceedings, so long as the disgorgement award “does not exceed a wrongdoer’s net profits and is awarded for victims.”
Justice Sotomayor, writing for the 8-1 majority, discussed three main ways in which courts have occasionally awarded disgorgement that “test the bounds of equity practice:” (1) Ordering the proceeds of fraud to be deposited in Treasury funds instead of disbursing them to victims, (2) imposing joint-and several disgorgement liability, and (3) declining to deduct even legitimate expenses from the receipts of fraud. She noted that the SEC’s disgorgement remedy in such incarnations is in “considerable tension with equity practices and may transform a disgorgement award into an impermissible penalty.”
The Court vacated the trial court’s judgment and remanded the case to the Ninth Circuit for further proceedings consistent with the principles discussed in the opinion.
Justice Thomas, the lone dissenter, argued that disgorgement is not a traditional equitable remedy and is therefore unavailable to the SEC under Section 78u(d)(5).
The opinion can be found here.