Highlights
The U.S. Supreme Court docket held that an SEC disgorgement award that doesn’t exceed a wrongdoer’s “web earnings” is permissible equitable aid beneath Part 21(d)(5) of the Change Act. The Court docket didn’t, nevertheless, resolve what sort of bills must be excluded from a calculation of a wrongdoer’s “web earnings”. The Court docket additionally didn’t present additional steerage on the suitable statute of limitations relevant to different kinds of aid in SEC enforcement actions
On June 22, 2020, the U.S. Supreme Court docket confirmed that the U.S. Securities and Change Fee (SEC) could search disgorgement in civil enforcement actions introduced in federal district courtroom.
In Liu v. Securities and Change Fee, the Supreme Court docket thought-about “whether or not, and to what extent, the SEC could search ‘disgorgement’ within the first occasion by means of its energy to award ‘equitable aid’” beneath Part 21(d)(5) of the Securities Change Act. The Court docket held that the SEC was licensed to hunt disgorgement beneath the Act, however solely insofar because it was restricted to the “web earnings” from a defendant’s wrongdoing.
The Ninth Circuit’s Choice
Liu arose from an SEC enforcement motion associated to the federal authorities’s EB-5 Immigrant Investor Program. The defendants raised $27 million by means of this system to construct and function a proton remedy most cancers therapy middle in California, however as an alternative of utilizing the cash raised from buyers for that function they used it to pay themselves thousands and thousands of {dollars} in “wage,” amongst different unauthorized bills. The SEC sued the defendants for violations of the anti-fraud provisions of the Securities Act and Securities Change Act, looking for not solely the quantity of ill-gotten positive aspects garnered from the defendants’ fraud, but additionally what defendants argued had been “respectable enterprise bills” that they had incurred working their enterprise.
On attraction to the U.S. Court docket of Appeals for the Ninth Circuit, the defendants argued that “[t]he federal courts are with out energy to award penalties absent express congressional authority . . . . To the extent the district courtroom meant to grant [the SEC] . . . disgorgement as an equitable treatment, the courtroom erred as a result of the truth is it awarded disgorgement additionally as a penalty.” Extra particularly, the defendants argued “that the district courtroom’s order that they disgorge . . . the overall quantity they raised from their buyers . . . much less the quantity left over and out there to be returned . . . was inaccurate.”
Citing the Supreme Court docket’s 2017 choice in Kokesh v. Securities and Change Fee, the defendants reasoned that, in refusing to deduct their “respectable enterprise bills” from the overall disgorgement award, the district courtroom ignored the well-settled definition of disgorgement as “an affordable approximation of earnings causally linked to the violation.”
The Ninth Circuit rejected the defendants’ arguments and as an alternative relied on a previous Ninth Circuit case, Securities and Change Fee v. JT Wallenbrock & Associates, to help its holding that “the correct quantity of disgorgement in a scheme reminiscent of this one is your complete quantity raised much less the cash paid again to the buyers.” The courtroom additionally rejected the defendants’ extra normal declare that the district courtroom lacked authority to impose disgorgement in any respect, insofar as disgorgement served as a penalty moderately than an equitable treatment.
The Supreme Court docket’s Choice
As famous above, the Supreme Court docket restricted its consideration in Liu to the query of “whether or not, and to what extent, the SEC could search ‘disgorgement’ . . . by means of its energy to award ‘equitable aid’” beneath the Securities Change Act. Consequently, the Court docket’s holding was restricted as effectively. The Court docket determined solely that “a disgorgement award that doesn’t exceed a wrongdoer’s web earnings and is awarded for victims is equitable aid permissible beneath” Part 21(d)(5). In reaching this conclusion the Court docket relied on the historic definition of disgorgement beneath the frequent regulation, specifically, that whereas fairness courts had generally imposed disgorgement to “deprive[] wrongdoers of their web earnings from illegal exercise,” courts additionally “constantly restricted awards to web earnings from wrongdoing after deducting respectable bills. Such treatments, when assessed in opposition to solely culpable actors and for victims, fall comfortably inside these classes of aid that had been usually out there in fairness.”
However the Court docket didn’t go additional to rule on the extra particular arguments raised by the events, together with whether or not the petitioners’ “disgorgement award [was] illegal as a result of it fail[ed] to return funds to victims” of the petitioners’ fraud, and since it didn’t “deduct enterprise bills from the award.” “As a result of the events centered on the broad query [of] whether or not any type of disgorgement could also be ordered,” the Court docket stated, “and didn’t absolutely transient these narrower questions, we don’t resolve them right here.”
Conclusion
Though Liu confirmed {that a} disgorgement award that “doesn’t exceed a wrongdoer’s web earnings” is permissible beneath the Change Act, it didn’t resolve a extra vital query that will have made the choice extra significant: In what particular circumstances does an SEC disgorgement award “exceed a wrongdoer’s web earnings” and develop into an impermissible penalty?
Additional, like Kokesh, Liu additionally left unanswered questions concerning the correct scope of injunctive aid in SEC enforcement actions, particularly, whether or not that aid is topic to a five-year statute of limitations like different SEC treatments. By failing to handle these questions, which come up repeatedly in SEC enforcement circumstances, the Court docket missed its alternative to complete the job it started in its earlier choices, and to offer definitive steerage for decrease courts and litigants concerning the correct lifespan of SEC enforcement actions.
