Blog Post: Grant of Certiorari Suggests the Supreme Court may Overrule Disgorgement as a Court-ordered Penalty in SEC Enforcement Actions

On November 1, 2019, the United States Supreme Court granted a writ of certiorari in Liu v. SEC, No. 18-1501, to address whether the Securities and Exchange Commission may obtain disgorgement in civil injunctive actions filed in federal court. How this case is decided may impact the federal courts power to impose so-called equitable remedies (not to mention the SEC’s enforcement program).

In 2017, the Supreme Court held in Kokesh v. SEC that the SEC’s ability to pursue disgorgement was subject to statutes of limitations because disgorgement was a penalty. Kokesh, however, stated that the decision should not “be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings.”

The defendants in Liu were found to have violated the Securities Act of 1933 in the course of a securities offering, and were ordered to disgorge all proceeds raised in that offering.

The Ninth Circuit, in addressing Liu’s argument that the District Court “lacked statutory authority to award disgorgement,” noted that the Supreme Court in Kokesh expressly declined to address whether courts’ equitable authority in SEC matters includes the power to award disgorgement. Accordingly, the court followed pre-Kokesh authority to affirm.

There are three things that make the grant of certiorari very interesting:

First, there does not seem to be a genuine circuit split here, and this perhaps hints that certain Justices want to substantially rework the law in this area.

Second, the transcript of oral argument in Kokesh records comments by four justices indicating their agreement that no authority for such a penal remedy exists. Transcript, Roberts, Ch. J. (p. 31, lines 16-18); Alito, J. ( p. 53, lines 12-14); Sotomayor, J. (p. 9, lines 5-9); and Kennedy, J. (p.7, line 20 - p. 8, line 2).

Finally, though equitable monetary remedies may be administratively imposed under Section 203 of the Investment Advisors Act, there is no basis in the federal securities statutes for District Courts to impose disgorgement – an order to make a payment in addition to the gross amount of the pecuniary gain. To my mind, when they do so, they are making and enforcing a common law of punishments. However, judicial crime creation is antithetical to American law. In keeping with the so-called “legality doctrine,” some states have expressly abolished common law crimes. E.g., Colo. Rev. Stat. §18-1-104 (2004) (“Common-law crimes are abolished . . . .”). The rest specify that no conduct or omission is a crime unless made so by the penal code. Ohio Rev. Code §2901.03(A) (2003) (“No conduct constitutes a criminal offense against the state unless it is defined as an offense in the Revised Code.”). Under federal law, “[i]t has long been settled that there are no federal common law crimes; if Congress has not by statute made certain conduct criminal, it is not a federal crime.” Wayne R. LaFave & Austin W. Scott, Jr., SUBSTANTIVE CRIMINAL LAW, vol. 1, §2.1(c), at 92; Liparota v. United States, 471 U.S. 419, 424, 105 S.Ct. 2084, 2087-2088 (1985) (“The definition of the elements of a criminal offense is en-trusted to the legislature, particularly in the case of federal crimes, which are solely creatures of statute.”) The reasons for the legality doctrine are well known: the need for fair notice; the principle that legislatures, rather than courts, should define what conduct is criminal; the preference that moral judgments be left to legislatures; and the need for precise definition of conduct subject to punishment. See Paul H. Robinson, “Fair Notice and Fair Adjudication: Two Kinds of Legality,” 154 U. Penn. Law Rev. 335, 340-341 (2005)

Here is an update describing the arguments in Liu v. SEC. Ronald Mann, “Argument analysis: Justices Seek Middle Ground on Sec’s Right to Disgorgement in Securities Litigation,”