Supreme Court Affirms in SEC v. Liu That the Commission Can Seek Disgorgement Awards – With Limitations

On June 22, 2020, the U.S. Supreme Court issued its decision in SEC v. Liu – a case presenting the question of whether the SEC has the power to seek disgorgement of a defendant’s ill-gotten gains when it brings lawsuits to enforce securities laws. Disgorgement awards account for the majority of the SEC’s monetary recoveries in securities fraud cases, and the securities bar had accordingly watched Liu closely. Although an 8‑1 majority of the Court affirmed the SEC’s statutory authority to seek disgorgement awards in appropriate cases, the Court also held that the Commission’s disgorgement power is limited. The SEC may only seek disgorgement of a defendant’s “net profits,” and disgorgement must be for the benefit of victims of fraud. The Court’s opinion leaves open the precise contours of those limiting principles. In a guest article, McDermott Will & Emery attorneys David K. Momborquette, Michael B. Kimberly and Matthew A. Waring examine the Court’s holding in Liu, its effect on the SEC’s efforts going forward and some unanswered questions remaining from the decision. For coverage of other Supreme Court rulings involving SEC practices, see “What the Supreme Court’s Decision in Lorenzo v. SEC Means for Fund Managers” (Jun. 18, 2019); and “Analysis of Lynn Tilton Trial: Controversial Forum, Key Takeaways and Defense Themes (Part One of Two)” (Aug. 9, 2018).

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