Over a presidential veto, Congress recently passed the 2021 National Defense Authorization Act (NDAA), H.R. 6395. Buried over 1,000 pages into the bill is an amendment to the Securities Exchange Act of 1934. That amendment gives the Securities and Exchange Commission explicit statutory authority to seek disgorgement in federal district court.
This grant of authority is significant, if also somewhat puzzling. Congress is now the second branch of government to address disgorgement over the last several months. In June 2020, the Supreme Court in Liu v. SEC upheld the SEC’s authority to seek disgorgement in district court, subject to certain limitations. The natural question to ask now that Congress has spoken is, what to make of Liu?
Despite this new legislation, Liu and the limits to disgorgement it set forth remain good law. The SEC’s disgorgement power does not exceed that prior to passage of the NDAA. If you believe some of the recent law firm press releases, by giving the SEC explicit disgorgement authority, Congress may have intended that Liu no longer apply. That argument is faulty for reasons both practical and doctrinal.
First, context matters. The grant of disgorgement authority should be seen partially as a response from a concerned Congress that the Supreme Court might have rejected the SEC’s disgorgement authority in Liu. Similar legislation to that in the NDAA was introduced in both the House and the Senate before Liu was decided. Thus, the NDAA is more properly interpreted as an explicit affirmation of the Supreme Court’s holding that provides protection to the remedy in addition to stare decisis.
Further, it would make little sense for the Supreme Court in Liu to comprehensively define disgorgement, then for Congress to use the same term six months later to mean an entirely different remedy. In fact, other language in the relevant provision of the NDAA supports the proposition that when Congress used the term disgorgement, it meant exactly what the Supreme Court described in Liu.
Section 6501 of the NDAA permits the SEC to seek disgorgement “of any unjust enrichment.” Prior to Liu, the SEC often sought, and courts often granted, disgorgement of a wrongdoer’s gross profits. The Supreme Court rejected that approach, clarifying that disgorgement must be tied to a wrongdoer’s net profits. Rather than redefine and unmoor disgorgement, use of the term “unjust enrichment” tethers the remedy to its equitable principles.
In addition, Section 6501 permits disgorgement of unjust enrichment “by the person who received such unjust enrichment.” Again, prior to Liu, the SEC often sought disgorgement on the basis of joint and several liability, particularly in insider trading cases. The Liu Supreme Court rejected that practice, stating that unless two persons or entities are engaged in “concerted wrongdoing,” imposing joint and several liability risks transforming “any equitable profits-focused remedy into a penalty.” Limiting disgorgement to unjust enrichment on an individual level, then, is entirely consistent with the Liu Court’s disapproval of joint and several disgorgement liability.
Finally, this is not the first time that the SEC has received a grant of disgorgement authority. The Commission was already explicitly permitted to seek disgorgement in administrative proceedings. That provision is § 78u-2(e), and it was not amended by the NDAA. It cannot be that disgorgement means one thing when the SEC seeks it in administrative proceedings and another thing in district court.
A final argument making the rounds is that, because Congress separated “disgorgement” from “equitable relief” in the statute of limitations sections of § 78(u)(d)(8), disgorgement as used in the NDAA refers to legal, rather than equitable, restitution. While there is a distinction between legal and equitable restitution, Congress likely did not have that nuance in mind with passage of the NDAA.
Rather, disgorgement is separated from equitable relief in the limitations provision for a practical reason: the extended limitations period for disgorgement where scienter is present is a legislative response to the Supreme Court’s holding in Kokesh, which solely addressed the limitations period for disgorgement, not equitable remedies more generally. That Congress sought to address Kokesh (which has significantly hampered SEC enforcement) by spelling out a longer limitations period for disgorgement in some instances should not be misinterpreted as a legislative attempt to redefine SEC disgorgement as legal restitution.