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Justice Thomas Provides A Disgorgement History Lesson And Asks An Important Question


Yesterday’s post highlighted the Supreme Court’s decision in Liu v. SEC in which the court held that for purposes of 15 USC 78u(d)(5) (concerning SEC actions in federal court) that “a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible” under 78u(d)(5).

The decision was 8-1 as Justice Clarence Thomas dissented.

As discussed below, in his dissent Justice Thomas provided a disgorgement history lesson and asked an important question with Foreign Corrupt Practices Act implications.

In short, Justice Thomas concluded that “disgorgement can never be awarded” under 15 USC 78u(d)(5) because “disgorgement is not a traditional equitable remedy.”

He then provided the following history (certain internal citations omitted).

“Disgorgement is not a traditional form of equitable relief. Rather, cases, legal dictionaries, and treatises establish that it is a 20th-century invention.

No published case appears to have used the term “disgorgement” to refer to equitable relief until the 20th century. Even then, the earliest cases use the word in a “nontechnical” sense … For example, in Byrd v. Mullinix, 159 Ark. 310, 251 S. W. 871 (1923), the Supreme Court of Arkansas affirmed the imposition of an equitable lien to prevent a debtor from “put[ting] the money in property which was itself beyond the reach of creditors, and to compel its disgorgement.” Likewise, in Armstrong v. Richards, 128 Fla. 561, 175 So. 340 (1937), the Supreme Court of Florida referred to “the right of the taxpayer to require an accounting from and disgorgement by public officers and those in collusion with them.” In these cases, the term “disgorgement” colloquially described what a defendant was ordered to do, not the remedy itself.

By the 1960s, published opinions began to use “disgorgement” to refer to a remedy in the administrative context. In NLRB v. Local 176, 276 F. 2d 583 (CA1 1960), the agency had “applied its . . . remedy of disgorgement of dues, requiring the union to refund to every member who had obtained employment on the Company project the dues which he had paid.” The court declined to enforce this part of the agency’s order, but not because disgorgement was an impermissible form of relief. Instead, it found that, in the circumstances of the case, disgorgement “seem[ed] . . . to be an ex post facto penalty.”

By the 1970s, courts started using the term “disgorgement” to describe a judicial remedy in its own right. When the SEC initially sought this kind of relief under the Securities Exchange Act in SEC v. Texas Gulf Sulphur Co., 312 F. Supp. 77 (SDNY 1970), the District Court called it “restitution,” and the Court of Appeals called it “[r]estitution of [p]rofits.” Courts soon substituted the label “disgorgement.” SEC v. Manor Nursing Centers, Inc., 458 F. 2d 1082, 1105 (CA2 1972); SEC v. Shapiro, 349 F. Supp. 46, 55 (SDNY 1972).

The late date of these cases is sufficient reason to reject the argument that disgorgement is a traditional equitable remedy.”

As described in the prior post, the specific statutory provision at issue in Liu is not implicated in the vast majority of modern day SEC issuer FCPA enforcement actions because such actions tend to be administrative actions – not federal court actions. In administrative actions, a separate statutory provision – 15 USC 77h-1(e) – expressly allows the SEC to “enter an order requiring accounting and disgorgement, including reasonable interest.”

In this regard, Justice Thomas asks an important question with FCPA implications.

He stated:

“It is unclear whether the majority’s new restrictions on disgorgement will apply to these [administrative] proceedings as well. If they do not, the result will be that disgorgement has one meaning when the SEC goes to district court and another when it proceeds in-house.”

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