Challenge to SEC's Disgorgement Authority Reaches Supreme Court

On Nov. 1, 2019, the U.S. Supreme Court granted certiorari in Liu v. Securities and Exchange Commission to address a question that, until fairly recently, seemed clear beyond cavil: whether the SEC has authority to obtain disgorgement in civil actions to enforce the federal securities laws. Since the 1970's, disgorgement of ill-gotten gains has been a powerful and frequently utilized weapon in the SEC's arsenal. In its June 2017 decision in Kokesh v. SEC, 137 S. Ct. 1635 (2017), the Supreme Court characterized SEC disgorgement as a "penalty" rather than an equitable remedy but expressly declined to decide whether courts possess authority to order disgorgement in SEC enforcement proceedings. In Liu, the Court will address head-on the question left open in Kokesh. The outcome of Liu has the potential to upset long-standing precedent and practices. If the Court further restricts the SEC's ability to obtain disgorgement, the decision will have significant ramifications for the SEC's enforcement program.

Evolution of the SEC's Authority

No statute expressly authorizes courts to award disgorgement to the SEC in civil enforcement actions. Rather, by statute, the SEC in district court proceedings may obtain only injunctions, civil monetary penalties, bars and suspensions from certain types of employment in the securities industry, and equitable relief. See, 15 U.S.C. §§77t; 78u(d). Nevertheless, for decades the SEC routinely has sought — and courts have granted — disgorgement as a component of equitable relief.