Circuit Split May Have Big Effect on SEC Disgorgement Remedy 

July, 2023 - Kobre Elisha J

In a decision issued late last month, the U.S. Court of Appeals for the Second Circuit provided new guidance on the rules governing the U.S. Securities and Exchange Commission's ability to seek the remedy of disgorgement in enforcement actions. The new guidance continues the process of resolving uncertainty left by the U.S. Supreme Court's 2020 decision in Liu v. SEC, and subsequent congressional legislation amending the Securities and Exchange Act, to expressly authorize the SEC to pursue disgorgement in civil enforcement actions. Critically, SEC v. Ahmed, issued on June 28, held that Liu's equitable limitations on disgorgement survived amendments to the Exchange Act that include a new provision expressly authorizing the SEC to pursue disgorgement. This holding creates a serious split in authority with the U.S. Court of Appeals for the Fifth Circuit that may ultimately need to be resolved by the Supreme Court. The Second Circuit also took a broad approach to Liu's holding that disgorgement be limited to net profits — a requirement imposed by Liu in recognition of disgorgement's equitable roots — declining to reduce disgorgement by the defendant's costs of executing the fraud because the transactions were "entirely tainted" by his failure to disclose conflicts of interests in the transactions. Finally, in one of the first circuit court cases to address the issue, the Second Circuit applied Liu to vacate an award for supplemental enrichment, holding that the award of actual gains earned during the asset freeze was not, without further analysis, consistent with Liu's general guideposts for equitable relief.

Republished with permission. This article, "Circ. Split May Have Big Effect On SEC Disgorgement Remedy," was published by Law360 on July 20, 2023.


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