Supreme Court Agrees to Hear Case on Whether SEC Can Seek Disgorgement as a Remedy for Securities Violations

The U.S. Supreme Court agreed to hear a case regarding whether the Securities and Exchange Commission (SEC) can seek disgorgement as a remedy for securities law violations.

When the SEC brings an action for securities violations, by statute it is authorized to seek injunctive relief, equitable relief, and civil monetary penalties.  The SEC has claimed, and courts have generally agreed, that the SEC may seek disgorgement (i.e., repayment of ill-gotten gains) under its authority to seek equitable relief, and that this is different from its authority to obtain civil monetary penalties.  In a 2017 case, Kokesh v. SEC, the Supreme Court held that disgorgement in SEC cases constitutes a “penalty” for purposes of determining whether disgorgement falls under a statute of limitations provision applicable to penalties.  WBK previously wrote about that case here.  The Supreme Court expressly noted that it was not deciding one way or another whether the SEC actually had the power to obtain disgorgement under its authority to seek equitable remedies.

In the current case, the SEC sued two operators of a fraudulent investment program and sought both civil monetary penalties and disgorgement.  The trial court ordered about $8 million in civil monetary penalties and about $27 million in disgorgement.  The program operators claimed that the SEC did not have the authority to seek the disgorgement part of the award since the Supreme Court had previously classified disgorgement as a “penalty,” and that the only type of penalties the SEC could seek under its applicable statutory authority are civil monetary penalties.  The trial court and the Ninth Circuit Court of Appeals (decision available here) decided the issue in favor of the SEC.  The program operators sought further review by the Supreme Court, which agreed to hear the case.