Supreme Court Narrows SEC Disgorgement Powers
The Supreme Court ruled that the SEC can order disgorgement as an enforcement remedy, but such disgorgement may have to be limited to net profits actually returned to investors. The Court held that disgorgement is a permitted equitable remedy and not an impermissible penalty, even though it previously held that disgorgement was a penalty when applying the 5-year statute of limitations. However, the Court questioned whether (i) disgorgement could exceed net profits without deducting legitimate expenses incurred, (ii) the SEC could deposit disgorgement funds into a Treasury fund without direct remittance to harmed investors, and (iii) joint and several liability was consistent with an equitable disgorgement order. The Court left those issues to the lower courts.
This case looks like an SEC win but is really a loss. It’s pretty clear (and has been generally accepted) that the SEC could impose disgorgement as an equitable remedy. However, the Court, without actually deciding, questions the limits of disgorgement. This could lead to severe limits on the SEC’s enforcement powers if it must always determine how to calculate and return net profits to specifically harmed investors.