Supreme Court Imposes Limits On SEC’s Ability To Obtain Disgorgements From Wrongdoers

The U.S. Supreme Court took a step in limiting the SEC’s ability to recoup illegal profits from wrongdoers this week. A ruling on Monday preserved the agency’s power to win disgorgement but also said that any disgorgement shouldn’t exceed the profits made by the wrongdoer, according to Bloomberg.

And why wouldn’t now be a great time to roll back the SEC’s power? After all, just days ago, German FinTech giant Wirecard imploded amidst allegations that its $2 billion cash balance didn’t exist and its CEO was arrested on Tuesday morning. 

The US usually wins disgorgements of more than $1 billion per year in federal court, different from fines, which the agency is also allowed to use as punishment. Justice Sonia Sotomayor wrote on behalf of the court that Congress had prohibited the SEC from seeking disgorgement “in excess of a defendant’s net profits from wrongdoing.”

Courts also must now subtract expenses, Sotomayor wrote. She continued that disgorgement needs to be geared toward compensating investors of fraudulent money and that it was still an “open question” if this money could be given to the Treasury when no investors were available. She also wrote that disgorgement needs to track individual wrongdoing and that the SEC couldn’t make one person give back the benefits an associate received.

She wrote: “Disgorgement must do more than simply benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains.”

Thanks to Sarbanes-Oxley, judges had traditionally made disgorgement awards in discretionary ways, instead of using strict rules.

Thomas Gorman, a partner at the international law firm Dorsey Whitney, and one of the country’s pre-eminent experts on SEC enforcement and insider trading said of the ruling: 

“The SEC suffered a significant loss today with the Supreme Court’s decision in Liu v. SEC. There the Court held that a “disgorgement award . . . [is permissible] that does not exceed a wrongdoer’s net profits and is awarded for victims is  . . .permissible. . . “  This rejects the SEC’s traditional approach to disgorgement which refused to net appropriate costs and expenses from an award of ill-gotten gains to victims.  Under the Court’s ruling the SEC will now have to determine the amount of any claimed ill-gotten gains and net legitimate costs incurred before returning the money to victims.”

Howard Fischer, a former SEC trial lawyer, said of the ruling that it: “will provide defendants strong ammunition for battling back against the SEC’s tendency to seek aggressive disgorgement remedies.”

Some SEC attorneys are just happy that disgorgement is still allowed in any fashion. Stephen Crimmins, a former agency enforcement attorney said: “That was the existential threat. This is a big win for the SEC.”

The couple being charged in the case before the court, Charles Liu and Xin Wang, were arguing that the SEC shouldn’t have access to any court ordered disgorgement at all. Clarence Thomas was the only judge who agreed with them.