Courts have been awarding disgorgement as an equitable remedy since the 1970s, on the assumption that securities laws provide courts with equity jurisdiction. However, the SEC’s authorizing statutes do not list disgorgement as an available judicial remedy.
The SEC has express statutory authority to obtain “disgorgement” in enforcement proceedings it brings before its administrative law judges.
Congress granted the SEC this authority in the Remedies Act of 1990, which expanded the SEC’s administrative enforcement powers to include “an order requiring accounting and disgorgement, including reasonable interest.”
Conversely, the federal securities laws do not explicitly grant the SEC authority to seek disgorgement in federal court. Instead, the statutes generally provide that the SEC may ask courts for “any equitable relief that may be appropriate or necessary for the benefit of investors.” The SEC has traditionally sought, and courts have awarded, disgorgement as an equitable remedy.
Regardless of the forum, disgorgement plays a large role in the SEC’s enforcement priorities. In the last few years, the SEC obtained disgorgement awards totaling more than $3.0 billion, which eclipsed other monetary penalties secured by the SEC.
Two recent cases are worth noting – Kokesh and Liu.
The Supreme Court’s June 2017 decision in Kokesh raised a hurdle to the SEC’s reliance on disgorgement as a cornerstone remedy. Given that the SEC used disgorgement to redress public wrongs and as general deterrence, the Court held that disgorgement was a “penalty” and thus subject to a five-year statute of limitations for penalties. After the decision, the SEC reported that the application of the five-year statute of limitations was significant “as many securities frauds are complex, well concealed, and are not discovered until investors have been victimized over many years.”
In 2016, the SEC charged Charles Liu and Xin (Lisa) Wang with defrauding Chinese investors of a project that the couple falsely claimed met the requirements of the EB-5 Immigrant Investment Program, which is subject to federal securities laws. Fifty investors paid nearly $27 million to fund the construction of a cancer treatment center in California. The SEC alleged that the couple misappropriated investors’ funds by diverting them to overseas marketers and paying themselves generous salaries. In April 2017, the U.S. District Court for the Central District of California granted the SEC summary judgment. The couple was ordered to pay approximately $8.2 million in civil penalties and roughly $26.7 million in disgorgement, both for which they were held jointly and severally liable.
In November 2019, the Supreme Court granted the couple’s petition for a writ of certiorari. In briefing, the couple argued that the omission of “disgorgement” from the statute listing the SEC’s judicial remedies was intentional, as Congress wrote a separate statute expressly authorizing the SEC to obtain disgorgement in administrative proceedings.
In June 2020, the Supreme Court upheld disgorgement as an available remedy in the case. Still, it held that disgorgement awards must be limited to wrongdoers’ net profits instead of their gross illicit gains.
The Supreme Court also cast doubt on whether the SEC may obtain disgorgement in cases where funds will be remitted to the U.S. Treasury instead of returned to identifiable victims.
National Defense Authorization Act
Fast forward to January 1. 2021, and the passing of the National Defense Authorization Act (“Act”). Included in the Act are Amendments that strengthen the SEC’s enforcement powers.
In summary, The Amendments double the SEC’s statute of limitations for disgorgement to 10 years in intentional fraud cases, grant the SEC 10 years to seek equitable relief in all cases, codify the SEC’s ability to obtain disgorgement in federal court proceedings, and make other changes that expand the SEC’s enforcement authority.
Specifically, the Amendments:
- Expressly authorize the SEC to seek, in federal courts, “disgorgement . . . of any unjust enrichment by the person who received such unjust enrichment as a result of such [a securities law] violation.” The SEC can now rely on express authority to seek disgorgement rather than the implied authority of Section 21(d)(5) of the Exchange Act, as extended by the Supreme Court in Liu. Remember, on June 22, 2020, the Supreme Court, in an 8-to-1 decision, held that the SEC may continue to obtain disgorgement in federal court, albeit in a significantly narrowed fashion.
- Establish a default five-year statute of limitations for disgorgement claims and a 10-year statute of limitations if the disgorgement claim involves conduct that violates specific antifraud provisions. The five-year statute of limitations for civil penalties remains the same.
- Establish a 10-year statute of limitations for “any equitable remedy,” including injunctions, bars, suspensions, and cease-and-desist orders, starting from the “latest date on which a violation gives rise to the claim” for the remedy occurs. No showing of intent or knowledge of wrongdoing is required.
- Toll the disgorgement and equitable relief statute of limitations for “any time” in which the defendant is “outside the United States.”
Note: The Amendments apply not only to future actions and proceedings but also apply to pending actions and proceedings.
In some cases, the SEC is now empowered to seek disgorgement and equitable relief related to alleged misconduct that occurred up to 10 years ago. It is perhaps even longer if the defendant traveled or resided outside the United States during the relevant period.
Remember, also included in the Act was the AMLA.
I welcome your thoughts and comments.
Attribution and other
William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021