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Supreme Court Decides SEC Disgorgement Case


Yesterday, the Supreme Court issued this opinion in Liu v. SEC.

At issue was 15 USC 78u(d)(5) which states in pertinent part that “in any action or proceeding brought or instituted by the Commission under any provision of the securities laws … any Federal court may grant .. any equitable relief that may be appropriate or necessary for the benefit of investors.” The specific question presented was whether the Securities and Exchange Commission may seek and obtain disgorgement from a court as ‘equitable relief’ for a securities law violation.

In addition to punishing securities law violations through civil proceedings in federal court, the SEC also uses administrative proceedings and 15 USC 77h-1(e) states that “in any cease-and-desist proceeding … the Commission may enter an order requiring accounting and disgorgement, including reasonable interest.” This provision was not before the Court in Liu and this is important to understand as approximately 90% – 100% of SEC FCPA enforcement actions against issuers in the modern era are administrative actions.

Thus, when the FCPA Blog states in this post that the decision in Liu will make “a significant change to how corporate FCPA settlements will be reached with” the SEC – this is not accurate as very few modern SEC enforcement actions against issuers result in federal court actions and the specific statute at issue in Liu.

The opinion authored by Justice Sotomayor recognizes that Congress did not define in 78u(d)(5) “what falls under the umbrella of equitable relief.” In interpreting this specific statutory provision, the opinion reviews equity jurisprudence and holds 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 court acknowledged that petitioner Liu argued that their disgorgement award was “unlawful because it crosses the bounds of traditional equity practice in three ways: it fails to return funds to victims, it imposes joint-and-several liability, and it declines to deduct business expenses from the award.” However, the opinion states:

“Because the parties focused on the broad question whether any form of disgorgement may be ordered and did not fully brief these narrower questions, we do not decide them here.”

Nevertheless, in dicta the opinion touched upon these three issues.

As to returning funds to victims, the court stated that “the equitable nature of the profits remedy generally requires the SEC to return a defendant’s gains to wronged investors for their benefit.” As to the SEC’s position that “the very fact that it conducted an enforcement action satisfies the requirement that it is appropriate or necessary for the benefit of investors,” the opinion states:

“But the SEC’s equitable, profits-based remedy must do more than simply benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains. To hold otherwise would render meaningless the latter part of 78u(d)(5).”

As to the deduction of business expenses from a disgorgement award, the opinion states “courts must deduct legitimate expenses before ordering disgorgement under 78u(d)(5).”

Here again the FCPA’s blog commentary is shallow as it states: “Previously, the SEC often ordered companies to disgorge the total “sales” amount stemming from corrupt activity. With Monday’s ruling, the SEC will be required to consider legitimate expenses associated with the sales activity.”

However, as FCPA practitioners who have negotiated resolutions with the SEC know, business expenses in connection with problematic sales are often part of the negotiating process with the SEC in arriving at a disgorgement amount. In fact, finance professionals from the issuer company often attend the negotiation meetings to present business expenses to arrive at a disgorgement amount that equates to a net financial benefit amount.

Indeed, at oral argument in Liu the government stated:

“In Foreign Corrupt Practices cases — Act cases, the wrong is that the defendant company has obtained a contract by paying a bribe to the public official, and the SEC would say, in those cases, the proper measure of disgorgement is net profits earned on the contract.”

In short, contrary to shallow FCPA blog commentary, Liu is not a very significant FCPA decision.

To repeat, Liu only applies to disgorgement amounts in a federal court action – a very small slice of issuer FCPA enforcement actions in the modern era.

As to these small slice of issuer FCPA enforcement actions, the most significant portion of the decision – albeit stated in dicta – may be that disgorgement “generally requires the SEC to return a defendant’s gains to wronged investors for their benefit.” As highlighted in this prior post, during oral argument the government stated:

“… [A]s an empirical matter, the SEC tries to return the money to investors when it can, and we’re largely successful in doing that. Now there is a category of cases like the FCPA cases, the Foreign Corrupt Practices Act cases, where sometimes we do get big judgments. They’re not returned to investors because there really is no obvious universe of individual victims from an FCPA violation — an FCPA violation.”


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