In an 8-1 decision, the U.S. Supreme Court today upheld the authority of the Securities and Exchange Commission (SEC) to seek disgorgement from defendants in SEC enforcement actions, but placed important limitations upon the remedy. Liu v. SEC. The SEC’s authority had been under attack since the Court’s 2017 decision in Kokesh v. SEC, holding that an SEC disgorgement order was a penalty for purposes of the five year federal statute of limitations applicable to penalties.

In Liu, the Court affirmed the SEC’s long-standing argument that disgorgement is a well-established equitable remedy designed to avoid having wrongdoers retain profits from their misconduct, and that Section 21(d)(5) of the Securities Exchange Act (15 USC s. 78u(d)(5)) authorizes the SEC to seek disgorgement among other equitable remedies. Because equitable remedies may not include penalties designed to punish or deter, however, the Court described several limits on the disgorgement remedy. Specifically, the Court advised that lower courts must deduct a defendant’s legitimate expenses before ordering disgorgement and that joint and several liability may result in an improper penalty to non-profiting defendants in the absence of a partnership or other concerted scheme. The Court expressly declined to decide whether disgorgement remedies that go to the U.S. Treasury may be considered to be “for the benefit of investors” as the statute requires. Because the record in Liu lacked sufficient findings on these limiting principles, the Court remanded the case for further proceedings.