Supreme Court puts new limits on SEC’s use of disgorgement

The Supreme Court today published an opinion that limits the SEC’s ability to use disgorgement without considering and deducting legitimate business expenses, making a significant change to how corporate FCPA settlements will be reached with the agency.

Previously, the SEC often ordered companies to disgorge the total “sales” amount stemming from corrupt activity. With Monday’s ruling, the SEC will be required to consider legitimate expenses associated with the sales activity.

Of the $12 billion the SEC recovered through enforcement actions during the last three fiscal years, $8.7 billion was disgorgement.

For example, in Microsoft’s 2019 FCPA settlement, the company disgorged $13.78 million to the SEC. The SEC’s administrative order said, “As a result of the improper payments, Microsoft obtained $13,780,733 in business.” No calculation was made to differentiate between the business won and the legitimate costs of delivering goods or services from the corrupt contracts.

Under Monday’s ruling, which concerned a securities fraud case, SEC disgorgement could be significantly reduced, even down to zero, if no profit was made on the activity.

From today’s opinion in Liu et al v. Securities and Exchange Commission:

The District Court below declined to deduct expenses on the theory that they were incurred for the purposes of furthering an entirely fraudulent scheme. It is true that when the “entire profit of a business or undertaking” results from the wrongdoing, a defendant may be denied “inequitable deductions” such as for personal services. Root, 105 U. S., at 203. But that exception requires ascertaining whether expenses are legitimate or whether they are merely wrongful gains “under another name.” Goodyear, 9 Wall., at 803. Doing so will ensure that any disgorgement award falls within the limits of equity practice while preventing defendants from profiting from their own wrong. Root, 105 U. S., at 207.

All Justices joined the opinion written by Justice Sonia Sotomayor except Justice Clarence Thomas, who filed a dissent. Justice Thomas said that “disgorgement is not a traditional equitable remedy” and the Court of Appeals’ judgment should be reversed.

Three years ago, the Supreme Court ruled in Kokesh v. SEC that disgorgement is subject to the federal five-year statute of limitations because the SEC uses it “as a penalty.”

Here is the Supreme Court’s opinion in Liu et al v. Securities and Exchange Commission.