Supreme Court Limits SEC’s Ability to Recoup Profits from Fraud

On June 22, 2020, The Supreme Court affirmed the Securities and Exchange Commission’s (“SEC’) ability to force defendants to forfeit money acquired through wrongdoing, but placed new limits on its disgorgement practice.
The Supreme Court held in an 8-to-1 decision that money must be rewarded for the benefit of investors/victims and cannot exceed the actual net profits that came from the wrongdoing. Prior to the decision in Liu et al v. Securities and Exchange Commission, the SEC had the ability to order companies to disgorge the total “sales” amount stemming from fraudulent activity. However, with the recent ruling in Liu, the SEC will be required to consider legitimate expenses connected to the sales activity, thereby limiting the profits the SEC may recoup to the actual profits stemming from the corrupt activity. SEC disgorgement may be significantly reduced, possibly down to zero, if no profit was made from the wrongdoing.
The SEC typically wins more than a billion dollars a year in disgorgement orders from federal courts. Disgorgement orders are distinct from fines, which the SEC uses to punish wrongdoing. Of the $12 billion the SEC recovered through enforcement actions during the last three fiscal years, $8.7 billion was disgorgement.

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