SEC Argues against Liu Disgorgement Ruling

On Friday, the Securities and Exchange Commission asked a federal appeals court to reconsider a ruling that it said prevents the agency from clawing back ill-gotten gains in cases in which laws were violated but no victims were harmed.

But that is the point of the Supreme Court decision in Liu vs. SEC, 140 S.Ct. 1936 (2020) held that the disgorgement remedy must comport with traditional equitable limitations, and therefore, disgorgement must be “awarded for victims.” Liu, 140 S. Ct. at 1940, and there can be no disgorgement if the investors did not suffer pecuniary harm.

According to press reports, the SEC apparently disagrees with the Supreme Court and is arguing that disgorgement is about “restoring the status quo by depriving a wrongdoer of his ill-gotten gains, not redressing pecuniary harms of victims.”

However, that argument runs against the second aspect of the case. The defendant had previously paid back at least part of his “ill-gotten gains” when he surrendered his stock back to the issuer. Incredibly, despite arguing that disgorgement was about depriving the wrongdoer of ill-gotten gains, the SEC was successful in the lower court, arguing that disgorgement was not affected by the repayment. In effect, the court ordered disgorgement twice.

The defendant appealed that to the Second Circuit, which agreed with him, holding that a defendant is “only required to give back the proceeds of his securities fraud once.” SEC v. Palmisano, 135 F.3d 860, 863 (2d Cir. 1998). A wrongdoer makes a payment in satisfaction of disgorgement when he returns property to a wronged party.

The SEC is appealing that part of the ruling as well.