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Supreme Court Upholds SEC Disgorgement, but with Some Big Asterisks

The SEC’s authority to seek disgorgement has been a spotlight issue for the last several years, and on June 22, 2020, the Supreme Court delivered a highly anticipated ruling that will have a mixed impact. On one hand, the Court’s ruling in Liu et al. v. Securities and Exchange Commission confirms that the SEC may indeed continue to seek disgorgement in civil enforcement proceedings — a question that had been raised by its 2017 decision in Kokesh v. SEC.1 However, the Court also placed restrictions on this equitable power, discussing how, over the years, courts have awarded disgorgement in ways that “test the bounds of equity practice.”2 The ruling offers useful tools for companies and individuals negotiating resolutions with the SEC or opposing hefty awards at trial.

For one, the Court reinforced precedent that a disgorgement award may deprive wrongdoers of their ill-gotten gains but, to avoid becoming a punitive sanction, must not exceed the net profits earned. In other words, legitimate expenses must be subtracted from whatever monetary benefit the defendant received when calculating the disgorgement amount. The Court cites cases where the SEC failed to deduct legitimate expenses, yet courts upheld the awards.3

Perhaps most significantly, the Court held that SEC disgorgement remedies must benefit the victims of the crime, and cannot simply “benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains.”4 This ruling raises serious implications for how the SEC may treat disgorged funds, much of which have traditionally been deposited into a Treasury fund rather than returned to victims. It also calls into question whether disgorgement is appropriate at all for crimes where victims are either difficult to identify or impossible to compensate, such as foreign bribery violations under the Foreign Corrupt Practices Act (“FCPA”).

I. How We Got Here

Disgorgement is used in SEC enforcement proceedings to supplement other remedies such as civil monetary penalties. There has been a heated debate over whether the SEC is allowed to seek disgorgement at all in civil enforcement proceedings because its relevant statutory authority is expressly limited to “equitable relief that may be appropriate or necessary for the benefit of investors.”5 Critics argue that the SEC’s calculation and enforcement of disgorgement awards is more akin to a penalty than equity.

Those critics gained traction in 2017, when the Supreme Court issued a ruling in Kokesh that the manner in which the SEC had structured its disgorgement award constituted a “penalty” rather than an equitable remedy for the purposes of the relevant statute of limitations.6 The Court raised, but expressly declined to answer, the question of whether courts may order disgorgement in SEC enforcement proceedings at all.7 Even with that question left open, Kokesh limited the scope of disgorgement to a five year limitations period, which reportedly cost the SEC more than a billion dollars in foregone enforcement proceeds in both 2018 and 2019.8 Still, in its most recent annual report, the SEC reportedly collected $3.25 billion in disgorgement in 2019.9 That amounted to almost 75% of all monetary awards collected by the SEC.10

Enter the Liu case, which squarely put into question for the Supreme Court whether and to what extent the SEC may seek “disgorgement” through its power to award “equitable relief ” under 15 U. S. C. §78u(d)(5), a power that historically excludes punitive sanctions.

II. Liu Case Background

Charles Liu and Xin Wang solicited $27 million from foreign investors under the EB-5 Immigrant Investor Program (the “EB-5 Program”).11 The EB-5 Program allows noncitizens to apply for permanent resident status by investing $500,000 in approved commercial enterprises. In a private offering memorandum sent to prospective investors, Liu and Wang represented that the bulk of the investors’ contributions would go toward construction costs of a cancer-treatment center.12 In reality, Liu and Wang misappropriated a large portion of the money, and the cancer center was not successful.13

The SEC charged Liu and Wang with securities fraud alleging that they misappropriated foreign investor funds. The district court ordered disgorgement of the full amount raised by investors, less the amount that remained in the corporate accounts for the cancer center project,14 and the Ninth Circuit affirmed.15 The disgorgement amount did not subtract funds that Liu and Wang spent on site leases or medical equipment.

The Supreme Court granted cert to decide the broad question of whether courts may order disgorgement as equitable relief. The Court analyzed traditional equity principles to find that equity historically has “authorized courts to strip wrongdoers of their ill-gotten gains” under various labels (e.g., restitution, an accounting, disgorgement) based on the “foundational principle” that “it would be inequitable that [a wrongdoer] should make a profit out of his own wrong.”16 However, the Court recognized that the remedy must be restricted to avoid transforming it into a punitive sanction17 and outlined three ways in which disgorgement awards have “tested the bounds” of equitable relief: (1) by allowing proceeds to be deposited in Treasury instead of disbursing them to victims; (2) imposing joint-and-several disgorgement liability; and (3) declining to deduct legitimate expenses from profits.18 The Court stated that these practices are “in considerable tension with equity practices,” and directed the Ninth Circuit to evaluate the issues on remand with this guidance in mind.

It is fitting that the Supreme Court’s ruling on a disgorgement issue carries a “to be continued” element, as it did in Kokesh. While defendants may lament that disgorgement remains a viable remedy, the restrictions are likely to have significant practical impact, namely:

  1. Legitimate Expenses Must Be Deducted from Disgorgement Awards: The Court made clear that net profits is the proper measure for disgorgement and courts must “deduct legitimate expenses” before ordering disgorgement under §78u(d)(5) to ensure it “falls within the limits of equity practice.”19 The Court left the window open for courts to reject “inequitable deductions” — costs that are fraudulent or that include items such as the defendant’s living expenses or personal compensation that are “merely wrongful gains under another name.”20
  2. Disgorgement Awards Must Be “For the Benefit of Investors”: Section 78u(d)(5) restricts equitable relief to awards that are “appropriate or necessary for the benefit of investors.” The Court rejected the SEC’s argument that it satisfies this obligation by depriving wrongdoers of their ill-gotten gains, which benefits the public at large.21 Relying on the cardinal principle that courts must give effect to every clause and word of a statute, the Court held that “for the benefit of investors” means the disgorgement amounts sought by the SEC must do more than simply “benefit the public at large” and must be returned to “known victims.”22

The Court acknowledged that the SEC has a practice of depositing disgorgement funds in the Treasury to pay whistleblowers who report securities fraud or fund activities of the Inspector General but left as an open question whether the SEC’s practice of depositing disgorgement funds with the Treasury was permissible under the bounds of §78u(d)(5) when returning funds was infeasible.23 It did note, however, that such a practice is in tension with equitable principles.

So where does this leave FCPA cases where there are often no clearly discernable victims and FCPA disgorgement awards are almost exclusively deposited in the Treasury? The facts of Liu concerned practical roadblocks to compensating victims — failed attempts to return funds to investors — not the absence of a discernible victim entirely. As Deputy Solicitor General Malcolm Stewart acknowledged at oral argument, “there is a category of cases like the FCPA cases … where sometimes we do get big judgments. They’re not returned to investors because there really is no obvious universe of individual victims from an FCPA violation….”24 It seems that without a victim to benefit, the disgorgement award falls into the territory of benefitting “the public at large,” which the Court stated was insufficient.25

As a practical matter, it will fall on the SEC to defend its practice of depositing disgorgement funds with the Treasury rather than returning them to victims, or to make more effort identifying victims to justify a disgorgement award. Though not common, this may not be an impossible task in some FCPA cases — in fact, FCPA victims have begun to self-identify. In September 2019 a judge in the Eastern District of New York issued a decision in U.S. v. Och-Ziff Capital Management Group LLC finding that 50 individual and entity investors were victims under the Mandatory Victims Restitution Act (“MVRA”) of Och-Ziff and its subsidiary for a wide-ranging foreign bribery scheme and were eligible to recover restitution for their losses in connection with the subsidiary’s plea agreement.26 Multiple MVRA claims have been submitted over the last several months by parties claiming to be “victims” of FCPA violations.27 One could envision circumstances where competitors passed over for some project submit a claim, though such claims have not yet proven successful. Even foreign governments whose officials received bribe payments have succeeded in bringing restitution claims where the bribery schemes resulted in overpayments or sub-par services being rendered.28

Still, the circumstances where a victim is discernible in an FCPA case may be rare. And if the award is limited to only those portions of a defendant’s profits that are provably linked to a specific victim, the disgorgement values are likely to fall dramatically. It is possible we see some of these questions answered on remand at the Ninth Circuit, particularly if the SEC must defend a deposit of some portion of the Liu disgorgement with the Treasury. The question of the “unidentifiable victim” will remain, but if the fallout of Kokesh taught us anything, these questions do not stay dormant for long. The SEC will continue seeking disgorgement, and given the large amounts typically sought, defendants will continue trying to chip away at what can be recovered.

1 591 U.S. ___, (slip op. at 5); Kokesh, 137 S. Ct. 1635, 1638 (2017). 

2 Liu, 591 U.S. __, (slip op. at 12).

3 Id. at 12 fn. 3.

4 Id. at 16.

5 15 U.S.C. § 78u(d)(5) (emphasis added). 

6 Kokesh, 137 S. Ct. 1635, 1638 (2017). See Jessica S. Heim, Christopher W. James & Francis Yang, “Kokesh costs SEC nearly $1 Billion; DOJ and Congress React,” The V&E Report, available at; John C. Wander, Christopher W. James & Michael C. Hoosier, “SEC Enforcement Report Signals Increased Enforcement, Lingering Limitations from Kokesh,” The V&E Report, available at

7 Id. at 1642 n.3. 

8 See U.S. SECURITIES AND EXCHANGE COMMISSION, Division of Enforcement, 2018 Annual Report at 5, available at; see also U.S. SECURITIES AND EXCHANGE COMMISSION, Division of Enforcement, 2019 Annual Report at 21, available at

9 See U.S. SECURITIES AND EXCHANGE COMMISSION, Division of Enforcement, 2019 Annual Report at 16, available at

10 See id. (explaining that disgorgement comprised $3.25 million of $404 million in monetary penalties.

11 Securities and Exchange Commission v. Liu, 754 Fed. Appx. 505, 506 (9th Cir. 2018).

12 Id. at 507. 

13 Id.

14 Id. 

15 Id. at 509. 

16 Liu, 591 U.S. ___, (slip op. at 6 – 7) (quoting Root v. Railway Co., 105 U.S. 189, 207 (1882). 

17 Id. (quoting Tilghman v. Proctor, 125 U.S. 136, 145–46 (1888). 

18 Id. at 12. 

19 Id. at 19.

20 Id. (internal quotations omitted). 

21 Id. at 15-16. 

22 Id. at 16. 

23 Id. at 15.

24 Transcript of Oral Argument at 35, Liu v. SEC, 591 U.S. ___ (2020) (No. 18-1501), available at

25 Id. at 16.

26 Court’s Memorandum & Order, U.S. v. OZ Africa Management GP LLC, No. 16-cr-515 (E.D.N.Y. Sept. 3, 2019), ECF No. 51. (“Och-Ziff Order”); see also Ephraim (Fry) Wernick and Daniel T. Wallmuth, “New Ruling in Och-Ziff Case Could Lead to a Billion Dollar Restitution Award and Throws Doubt on Benefits of Settling FCPA Cases,” Vinson & Elkins Foreign Corrupt Practices Act Update, Sept. 18, 2019, available at

27 See e.g., Petitioner Victim Petroecuador’s Memorandum of Law in Support of Motion for Recognition of Its Rights as a Victim and Entitlement to Restitution, No. 18-CR-20312-COOKE (S.D. Fl. 2018) (seeking victim status under the MVRA and other statutes in Frank Chatburn FCPA enforcement action); see also Ephraim (Fry) Wernick, Brian L. Howard II, and Michael Hoosier, “Venezuela’s CITGO Joins Other Companies and State-Owned Entities Seeking to Claim Victim Status and Restitution in FCPA Cases”, The V&E Report, available at

28 See U.S. v. Kenny Int’l Corp., Cr. No. 79-372 (D.D.C. 1979) (ordering defendant that pled guilty to violations of the FCPA’s bribery provisions to pay restitution to Cook Islands government); U.S. v. F.G. Mason Eng’g, Inc., Cr. B-90-29 (D.Conn. 1990) (ordering defendant pay restitution to West Germany government after guilty plea to conspiracy to violate the FCPA); U.S. v. Diaz, No. 09-cr-20346-JEM, Dkt. 37 (S.D. Fla. Aug. 5, 2010) (ordering defendant to pay restitution to Haitian government after guilty plea to FCPA bribery violations involving state-owned telecommunications company).

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.