In Liu v. SEC, the U.S. Supreme Court affirmed the SEC's ability to seek disgorgement as an equitable remedy for violations of the securities laws, but clarified that this power is limited by certain long-standing principles. 140 S. Ct. 1936 (2020). After Congress passed the National Defense Authorization Act for Fiscal Year 2021 (NDAA) amending the Securities Exchange Act of 1934 (Exchange Act) to provide the SEC with explicit authority to seek disgorgement in federal court, H.R.6395, 116th Cong. (2020) §6501, some wondered what the effect would be on the limiting principles set out in Liu. A year later, courts are thus far consistently applying the Liu limiting principles notwithstanding the NDAA's amendments. Therefore, practitioners should continue to look to Liu for the relevant limits on disgorgement as an equitable remedy.

Evolution of SEC's Power To Seek Disgorgement: 'Kokesh' and 'Liu'

Prior to the passage of the NDAA, the SEC had argued that disgorgement was an "equitable remedy" and therefore appropriately cabined within §21(d)(5) of the Exchange Act's allowance for "any equitable relief that may be appropriate or necessary for the benefit of investors." 15 U.S.C. §78u(d)(5). The Supreme Court has historically referred to disgorgement as an equitable remedy, and until recently, there had not been a serious challenge to the SEC's ability to seek disgorgement.

That all changed four years ago when the Supreme Court held in Kokesh v. SEC that disgorgement orders constitute a "penalty" for purposes of statute of limitations and included a footnote questioning (without answering) whether the term "equitable relief" as used in §21(d)(5) permitted the SEC to obtain the remedy of disgorgement under any circumstances. 137 S. Ct. 1635, 1639, 1642 n.3, 1643-45 (2017).