On November 1, 2019, the U.S. Supreme Court agreed to take a case challenging the authority of the Securities and Exchange Commission (SEC) to seek and obtain disgorgement of profits from persons who violate the federal securities laws. The case is Charles C. Liu, et al., Petitioners v. Securities and Exchange Commission.
The SEC has the statutory authority to obtain injunctive relief, equitable relief, and civil monetary penalties in enforcement actions. For years, U.S. Federal Courts have routinely required defendants to disgorge their ill-gotten gains under the theory that disgorgement is an equitable remedy.
On June 5, 2017, however, the Supreme Court unanimously held in a case called Kokesh v. SEC that disgorgement is a penalty for statute of limitations purposes, meaning that the SEC must make a request for disgorgement within five years of the date the claim accrued.
In a footnote in Kokesh, the Supreme Court stated, “Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.” Not surprisingly, defendants in SEC actions now regularly raise the argument that the SEC may no longer seek disgorgement in light of Kokesh.
The Supreme Court now will resolve this important issue. In the Liu case, a husband and wife were convicted of taking millions of dollars from Chinese investors seeking U.S. visas. The SEC requested that the couple disgorge almost $27 million that they had received from those investors.
From a timing perspective, assuming there are no extensions, briefing should be complete by mid-February 2020, with oral arguments likely to take place later that month or in March. Any amicus briefs supporting the Petitioner are due on December 23, 2019.