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Securities Regulation

Liu v. SEC: The Supreme Court Limits the SEC’s Disgorgement Power and Sets the Stage for Future Legal Battles

By Neil T. Smith, David Peet, R. Nicholas Perkins, K&L Gates

On June 22, 2020, in a much-anticipated decision, the Supreme Court held that the Securities and Exchange Commission (“SEC” or “the Commission”) can continue its longstanding practice of seeking disgorgement as an equitable remedy in judicial proceedings under Section 21(d) of the Securities Exchange Act of 1934.

In Liu, the Court held that a disgorgement award that (1) does not exceed a wrongdoer’s net profits, and (2) is awarded for victims constitutes an equitable remedy within the scope of the SEC’s statutory authority. In so holding, the Court made clear that legitimate business expenses must be accounted for in determining how much the SEC can seek in disgorgement. Though the Court indicated its skepticism toward the SEC’s longstanding practice of sending disgorged funds to the Treasury, it did not specifically address whether disgorged funds must be returned to victims of the misconduct being prosecuted, leaving that determination to the lower courts. The Court also left unanswered whether the SEC is authorized to impose joint and several liability on violators. Following Kokesh and other recent decisions, this is the Supreme Court’s latest decision to rein in the SEC’s enforcement authority.

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