Finding the Boundaries of Equitable Disgorgement
The disgorgement of “ill-gotten gains” is a significant mechanism for enforcing the securities laws. By compelling a violator of the securities laws to forfeit their illegal proceeds, disgorgement serves as a strong deterrent for securities fraud and an important method by which investors are compensated for unjust losses in the market—and today accounts for the recovery of billions of dollars annually. Despite its importance, commentators in recent years began to call into question the availability of the disgorgement remedy for the SEC. The SEC pursues disgorgement under the agency’s grant for seeking equitable relief for the benefit of investors; however, courts have arguably applied disgorgement in a manner that renders it a penalty—and thus beyond the scope of SEC enforcement.
In June 2020, the Supreme Court stepped in to provide clarity as to the future of disgorgement as an equitable remedy. In Liu v. SEC, the Court held that while disgorgement remains available for the SEC, a disgorgement award cannot exceed the net proceeds that result from a violation of the securities laws. More specifically, the Court took issue with three instances in which lower court applications of disgorgement had tested the line between equity and penalty. First was the common practice of returning disgorged funds to the Treasury rather than to harmed investors. Second was through the imposition of joint-and- several liability, and third was the practice of denying cost and expense deductions from disgorgement awards.
This Note proposes a method for navigating the boundary of equitable disgorgement. In particular, this Note argues that disgorged funds can be equitably returned to the Treasury to the extent that the method of remittance reflects a focus on investor compensation and an expansive view of “benefitting investors.” Further, joint-and-several liability may be appropriate in the context of a fraudster’s claim to proceeds held by another; and finally, equity requires that legitimate deductions include more than legitimate costs and expenses, but the subsequent disposal of profits as well. This approach to applying disgorgement can result in an equitable imposition of the remedy and the continued efficacy of an important enforcement mechanism for policing securities markets.
Cameron K. Hood