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Supreme Court Backs SEC Disgorgement Practices

Pensions & Investments

June 22, 2020

The Supreme Court on Monday backed the Securities and Exchange Commission’s practice of seeking disgorgement of profits from companies involved in fraud and giving it to harmed investors.

Writing the 8-1 majority opinion, Associate Justice Sonia Sotomayor said the practice is legally permissible equitable relief, as opposed to a punitive action, as long as the SEC disgorges the net profits from the wrongdoing and awards it to victims.

“It’s an important decision for the markets” because it allows the SEC to continue seeking money for investors, said Laura H. Posner a partner at Cohen Milstein Sellers & Toll. Ms. Posner wrote an amicus brief for the North American Securities Administrators Association urging the Supreme Court to support the practice. “It is largely consistent with how regulators seek disgorgement in the first place. Had the SEC lost, it would have been very problematic for the markets,” Ms. Posner said in an interview.

The case, Charles C. Liu, et al. vs. Securities and Exchange Commission, now goes back to the 9th U.S. Circuit Court of Appeals in Pasadena, Calif., to decide other questions not addressed in the narrow Supreme Court ruling.

The case stems from the SEC’s civil lawsuit against an investment scheme that raised $27 million from Chinese investors in a visa investment program. A federal court agreed with the SEC and ordered the backers of the scheme to return, or disgorge, the money and pay a penalty of more than $8 million.

The scheme’s backers then petitioned the Supreme Court to decide whether disgorgement is the same as a penalty when used to discourage further fraud, and whether the SEC can then use it.

Read Supreme Court Backs SEC Disgorgement Practices.