Technically speaking, the high court ruled 8-1 to vacate and remand the case for further proceedings. However, in its ruling, the Supreme Court clarified that, as a general matter, in a Securities and Exchange Commission (SEC) enforcement action, a “disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under U.S. Code Section 78u(d)(5). ”
Justice Sonia Sotomayor filed the majority opinion, with only Justice Clarence Thomas breaking with the bench and filing a dissent.
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Laura Posner, a partner at Cohen Milstein and also a former regulator who is highly active on SEC issues, actually has quite a different interpretation of the ruling, suggesting the SEC has basically been left with its full authority intact.
“This ruling could have been structured in a way that entirely robbed the SEC of its ability to secure disgorgement generally,” she tells PLANADVISER. “Thankfully, I don’t see this ruling as significantly limiting their authority at all in practical terms. It is clear to me, based on how they are remanding the case and the questions that they have left open, that the Supreme Court feels money spent in furtherance of outright fraud can be subject to disgorgement. The ruling simply instructs the lower courts to run an analysis of whether any funds have been spent for truly legitimate business purposes, and to use this analysis to help inform their disgorgement proposals.”
To clarify her position, Posner pointed out that the SEC in practice has drawn a distinction between cases where a business may have committed an inadvertent or partial fraud versus cases where fraud is at the heart of an operation or enterprise. She said the Liu case is an example of the latter, noting that evidence submitted at trial makes her believe that there were not any legitimate business purposes involved in this case.
“The SEC does not as a general matter attempt to force truly legitimate businesses to disgorge profits that were not related to an incidental case of fraud or noncompliance,” Posner said. “That is an entirely different matter than the type of major fraud cases like this one. The defendant/petitioners raised some $27.5 million with no business plan.”
In her view, moving forward, the SEC will simply have to do some additional analysis in these types of cases to tease out whether there have been monies spent towards legitimate business purposes. This information can then be used in the disgorgement process. Posner noted that this type of analysis is already a part of privately sponsored litigation, adding that it does not generally protect fraudsters from having to repay ill-gotten funds and profits.
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