Supreme Court Limits SEC Disgorgement Power

The Supreme Court has ruled that the SEC can seek disgorgement as an equitable remedy in cases under the Securities Exchange Act of 1934.

The Court held that a disgorgement award that (1) does not exceed a wrongdoer’s net profits, and (2) is awarded for victims is an equitable remedy within the scope of the SEC’s authority. The Court said that legitimate business expenses must be accounted for in determining how much the SEC can seek in disgorgement. Though the Court was skeptical of the SEC’s practice of sending disgorged funds to the Treasury, it did not specifically say disgorged funds must be returned to victims. That decision was left to the lower courts.

WHY THIS IS IMPORTANT…This is the Court’s latest decision to rein in SEC authority. While it stopped short of eliminating the SEC’s authority to seek disgorgement for securities law violations, it provided tools for challenging and limiting the amount sought.