The U.S. Supreme Court will review a case that challenges the SEC's ability to seek disgorgement in district court proceedings.
In 2016, the SEC charged a husband and wife for defrauding Chinese investors by falsely claiming that their investments would support a project that met the requirements of the EB-5 Immigrant Investment Program. The proposed project included funding the development and operation of a cancer treatment center. The SEC alleged that the defendants misappropriated or diverted the funds. The U.S. District Court for the Central District of California granted summary judgment to the SEC, and ordered the couple to disgorge approximately $26.7 million as well as a civil money penalty of over $8 million.
The issue before the Supreme Court is "whether the Securities and Exchange Commission may seek and obtain disgorgement from a court as 'equitable relief' for a securities law violation even though the Supreme Court has determined that such disgorgement is a penalty." In their petition for certiorari, granted on November 2, 2019, the petitioners argued that disgorgement is not equitable relief under the Court's reasoning in Kokesh v. SEC and, therefore, the SEC does not have the power to obtain disgorgement in judicial proceedings because it has not been authorized by Congress to do so.
Commentary Kyle DeYoung
A loss in this case would be a major blow to the SEC. The Commission routinely seeks disgorgement in its enforcement actions and obtained orders for more than $2.5 billion in disgorgement in FY 2018 alone. While much of this is obtained through settled actions filed as administrative proceedings - where the SEC is authorized by statute to seek disgorgement - losing the ability to obtain disgorgement in enforcement actions brought in federal court would have a significant impact on the SEC's enforcement program.
It will be interesting to see how the SEC responds to the increased uncertainty created by the Supreme Court's grant of certiorari. One possibility is that the Commission could be far more selective in the cases where it seeks disgorgement and only do so in cases where the money will actually be returned to harmed investors. While this would make good sense and address one of the main arguments for why disgorgement is not equitable relief, it would be a marked departure from the SEC's recent practice and would significantly reduce the amount of disgorgement obtained. The Commission also could decide to bring more contested actions as administrative proceedings and rely on the statutory authority to seek disgorgement in this forum. While this also would address one of the main arguments against its ability to obtain disgorgement in federal court actions, it would subject the SEC to additional criticism about its home court advantage and likely would lead to other challenges.
The Supreme Court's review of the case also may make Congressional action more likely. The ability of the SEC to make wrongdoers pay back ill-gotten gains is an issue that has some bipartisan support. Congress has debated providing the SEC with explicit authority to obtain disgorgement in district court cases since Kokesh. The very real possibility of the Supreme Court taking it away may provide the impetus for Congress to grant explicit authorization.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
