Liu v. Securities and Exchange Commission (United States Supreme Court)

Ending an Unlawful Fifty-year Practice, the Supreme Court Agrees with NELF that Federal Courts Lack Inherent Equitable Power to Impose “Disgorgement” as a Penalty for Violation of Securities Laws.

Liu v. Securities and Exchange Commission (United States Supreme Court)

This case involved the question of whether the Securities and Exchange Commission has long been obtaining monetary relief from private parties unlawfully.  For five decades the SEC has invoked the inherent equitable powers of federal courts in order to obtain “disgorgement” of funds acquired in violation of securities laws.  The amounts won by the commission had come to total billions of dollars annually.

The SEC sued the petitioners, alleging that they had misappropriated funds as part of a sham investment scheme.  The district court granted the SEC summary judgment and, relying on its equitable powers, ordered petitioners to disgorge over $26 million.  Notably, the SEC did not ask that those funds be distributed as restitution to the defrauded investors.

The petitioners lost their appeal in the Ninth Circuit, and the Supreme Court granted cert.  The petitioners argued that since the Court had recently decided that such SEC disgorgements are penalties, the courts must be without equitable jurisdiction to order disgorgement because equity cannot impose penalties.

NELF filed a supporting amicus brief in which it noted that, at the time of the American Revolution, nothing in English Courts of Chancery resembled the punitive disgorgements obtained by the SEC over the past fifty years.  Among other historical corroboration, NELF showed that four 18th century British law dictionaries contained no entries for either “disgorge” or “disgorgement.”

NELF then examined Kokesh v. Securities and Exchange Commission, 137 S.Ct. 1635 (2017). The SEC contended that although Kokesh had held that the disgorgements at issue there to be penalties, the holding was confined to the limitations of action issue presented in that case.  NELF responded that the three factors the Kokesh Court found decisive on the penalty question have no necessary connection to the law of limitations of actions.  Principal among those factors was that such disgorged funds typically are not used to make restitution to injured parties but are kept by the government.  NELF also showed that cases cited for support by the SEC, even when they use the word “disgorgement,” in fact awarded relief that was restitution given to the injured parties in order to restore them to the status quo ante.

NELF also explained why the SEC’s reliance on the canon of prior construction fails. This canon applies when specific words of a statute have received authoritative interpretation by courts and a reenactment retains those words; the words are then deemed to bear the prior construction.  The NELF explained, point by point, that none of the elements of the canon was satisfied here.  NELF examined cases cited by the SEC, and found that the cases fail to show that the Court had reached a clear, settled view that punitive disgorgement, like that described in Kokesh, is relief available under the equitable powers of a court.  The cases merely reveal the Court sometimes using the word “disgorgement” in a non-punitive sense, as a synonym for restitution made to injured parties to put them back into the status quo ante, unlike the disgorgement ordered in this case.

In an 8-1 decision, issued on June 22, 2020, the Court held that “disgorgements,” to be equitable, must be limited to stripping a wrongdoer of unlawful gains in order to return them to his victims.  The relief must be restitutionary and aim to restore the status quo ante, exactly as NELF had pointed out was the historical practice of the Court.



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