On June 22, the Supreme Court issued an opinion in Liu v. SEC holding that the Securities and Exchange Commission may pursue, and courts may grant, disgorgement under 15 U.S.C. § 78u(d)(5), but only when the disgorgement award “does not exceed a wrongdoer’s net profits and is awarded for victims.”
Because the parties in Liu focused on whether disgorgement is permissible at all, rather than on whether the specific underlying disgorgement award exceeded the lower court’s authority, the Supreme Court remanded the case for the district court to consider the precise measure of appropriate disgorgement. In doing so, the court provided guidance as to when disgorgement awards are appropriate and instructed district courts to fashion such awards consistent with several principles articulated in its opinion.
Writing for an 8–1 majority, Justice Sonia Sotomayor explained:
- The disgorgement award “must do more than simply benefit the public at large by depriving a wrongdoer of ill-gotten gains.”
- The disgorgement remedy should be limited to the wrongdoer’s net unlawful profits or the “gain made upon any business or investment, when both the receipts and [expenses] are taken into account.”
- Disgorgement should be limited to the profits obtained by each individual defendant. The court expressly called into question more expansive bases for disgorgement awards, such as pursuit of profits under a joint-and-several liability theory.
Although these broad guidelines leave many questions unanswered, the decision in Liu should not materially alter how disgorgement operates in the investment adviser space, an area that has been an SEC enforcement priority for several years.
Given the existence of the Enforcement Division’s Asset Management Unit and the priorities of the SEC’s Office of Compliance Inspections and Examinations (OCIE), the SEC will likely continue focusing on investment advisers and investment companies as part of its enforcement efforts.
As SEC Chairman Jay Clayton remarked, “[i]nvestment advisers play a vital and trusted role in our markets … Regardless of the scope and duration of the investment advisory services, investment advisers are fiduciaries and, as such, their duties of care and loyalty require them to disclose their conflicts of interest, including financial incentives.”