On 3rd Anniversary of Liu v. SEC, Amy Longo and Brooke Cohen Discuss Disgorgement Remedy in Law360

In The News
June 23, 2023

Three years have passed since the U.S. Supreme Court handed down Liu v. SEC, which held that the U.S. Securities and Exchange Commission can seek equitable disgorgement of defendants' net profits — less legitimate business expenses — provided it is for the benefit of harmed investors. Litigation & enforcement partner Amy Jane Longo and associate Brooke Cohen analyzed the trends that have emerged over that time and the key issues to follow in the courts’ application of the disgorgement remedy in Law360.

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How Courts are Treating SEC Disgorgement 3 Years After LIU
By Amy Jane Longo and Brooke Cohen
June 21, 2023

Three years have passed since the U.S. Supreme Court handed down Liu v. SEC, which held that the U.S. Securities and Exchange Commission can seek equitable disgorgement of defendants' net profits — less legitimate business expenses — provided it is for the benefit of harmed investors.[1]

Last year, we analyzed the first two years of the case's progeny and observed that courts' decisions heavily supported the SEC, awarding the commission significant discretion and showing considerable reticence toward disrupting disgorgement orders.

Consistent with those trends, case law in Liu's third year continues to veer significantly in the SEC's favor, including decisions interpreting the interplay of Liu with the January 2021 amendments to the Securities Exchange Act of 1934 enacted as part of the National Defense Authorization Act. The promise of dramatic limitations on disgorgement heralded by Liu recedes further into the distance with each passing year.

On the third anniversary of the Liu decision, there are four key issues to follow in courts' application of the disgorgement remedy.

Disgorgement "for the Benefit of Investors"

In Liu, the Supreme Court held that the SEC could only appropriately receive disgorgement where (1) the remedy was designed to benefit investors who suffered harm from the violation at issue; and (2) the SEC would distribute disgorged funds to those investors if feasible, or otherwise to the Treasury. The practical implications of these limitations have continued to play out in district courts, with many courts granting the SEC's disgorgement requests notwithstanding Liu's limitations.

Not every disgorgement motion has been decided in the SEC's favor. In SEC v. Johnson, decided in March, the U.S. District Court for the Central District of California rejected the SEC's bid to send funds to the Department of the Treasury, finding that the record had not sufficiently and adequately addressed how disgorging the defendant's net profits to the Treasury is "appropriate and necessary for the benefit of investors" and consistent with "traditional equitable principles."[2] The court declined to award disgorgement in the absence of such a

However, this appears to be an aberration. Other recent case law has solidified that courts can take the SEC at its word that it will identify investors and return funds — requiring no detailed findings. For example, in SEC v. Arias, decided in February, the U.S. District Court for the Eastern District of New York found sufficient the SEC's statement that it would return disgorged funds to investors if it could collect them.[3] The court did not require a comprehensive showing of how the harmed investors would be identified and returned the funds.

Yet other courts have concluded that the NDAA amendments — which were largely seen as a legislative response to the Supreme Court's 2017 decision in Kokesh v. SEC[4] — mean that the SEC is no longer obligated to demonstrate that disgorgement is for the benefit of harmed investors, as this limiting language does not appear in the statute.

For example, in SEC v. Keener, decided by the U.S. District Court for the Southern District of Florida in December 2022, the court held that the alleged lack of "wronged investors" did not preclude ordering disgorgement of defendant's earnings.[5] The court held that (1) Liu's inquiry focused on the wrongdoer's net profit, not investor's losses, and (2) the SEC does not need to point to specific victims of defendant's unlawful dealing. The SEC's showing that the majority of investors suffered losses sufficed to satisfy the court's reading of the NDAA.

Likewise, in SEC v. Spartan Securities Group Ltd., the U.S. District Court for the Middle District of Florida last year pointed to the absence of "benefit of investors" language in the NDAA in holding that the SEC was no longer required to identify any specific harmed investor.[6] The court held that principles of equity were best satisfied by ordering disgorged funds returned to the Treasury in lieu of permitting the money to remain with the wrongdoers, and that the language of the NDAA implied this intended result.

The U.S. District Court for the Southern District of New York reached a similar result last month in SEC v. O'Brien, finding disbursement to the Treasury appropriate in a market manipulation case involving over 18,000 trading events, accepting the SEC's contention that it would be "enormously difficult, if not impossible" to identify harmed investors and return funds to them.

In administrative orders, the SEC continues to impose disgorgement in cases where funds are being returned to the Treasury.[7] This issue has yet to reach appellate review by any court, but the resolution of these divergent interpretations will be a key area to watch in the coming year.

Legal vs. Equitable Disgorgement

A circuit split is emerging in the case law as to whether the NDAA amendments codify Liu, have no bearing on it, or introduce another basis for disgorgement entirely. Whether Liu is relegated to a subset of cases addressing only equitable rather than legal disgorgement will have a significant effect on what the SEC must prove to obtain this remedy if other circuits follow suit.

The U.S. Court of Appeals for the Tenth Circuit has weighed in twice in the last year on Liu's implications for equitable disgorgement. In September, the Tenth Circuit held in Integrity Advance LLC v. CFPB that "Liu involved a disgorgement order under a statute allowing only equitable relief," so the "net profit" requirement does not apply to situations that involved both legal and equitable relief.[8] Here, petitioners were ordered to pay both legal and equitable restitution. Since the petitioners did not challenge the legal/equitable designation, the court evaluated "the case as one involving a legal, not equitable, remedy."[9]

In June 2022, the Tenth Circuit rejected in SEC v. Young a petitioner's request to have the court approve their proposed deduction on the papers, citing Liu's holding that "the district court must hold a hearing to determine how much disgorgement the SEC can reasonably hope to recover."[10] In a footnote, the court acknowledged the NDAA's language but stated that "no party argues that Congress's endorsement of the 'disgorgement' remedy affects the Supreme Court's discussion of the limits to that form of relief."[11]

Conversely, Conversely, in SEC v. Hallam, decided in July 2022, the U.S. Court of Appeals for the Fifth Circuit held that the NDAA amendments provide for disgorgement as a legal remedy, separate and apart from the equitable disgorgement remedy authorized by Liu.[12]

By contrast, 2021 decisions in the U.S. Court of Appeals for the Second Circuit (SEC v. de Maison) and Tenth Circuit (SEC v. Camarco) interpreted Liu without regard to the NDAA amendments.[13]

Joint and Several Disgorgement

Courts have generally sided with the SEC in awarding disgorgement awards in instances of joint and several liability, which Liu held could only occur where "concerted wrongdoing" could be established among multiple persons.

Appellate decisions in the Fourth, Fifth and Ninth Circuits in the last year have affirmed joint and several disgorgement awards, finding Liu's criteria of joint wrongdoing amply satisfied in the context of one or more individuals and the entities with which they were associated.

In SEC v. World Tree Financial LLC, decided in August 2022, the Fifth Circuit affirmed a district court's order for joint and several disgorgement by two of three defendants, noting that the defendant company and chief executive had engaged in "concerted wrongdoing."[14] The Fifth Circuit also highlighted the district court's determination that the third defendant had not participated in the scheme nor received wrongful profits from the other defendants' violations and thus was not jointly and severally liable for the disgorgement.[15]

Similarly, the U.S. Court of Appeals for the Fourth Circuit held in SEC v. Johnson that Liu permits joint and several disgorgement for "partners engaged in concerted wrongdoing," but says little about whether disgorgement is appropriate, i.e., not punitive, when the wrongdoers are an entity and a control person.[16] The Fourth Circuit filled in this gap by noting that "[i]t's hard to imagine what would amount to concerted wrongdoing between an entity and its control person if not this case."[17]

The U.S. Court of Appeals for the Ninth Circuit took a similar approach in SEC v. Yang, affirming a disgorgement award "jointly and severally among the defendants" because the individual defendant "misappropriated investor funds and transferred them to … an entity that he owned and controlled."[18]

Notably, upon Liu's second appeal, the Ninth Circuit in SEC v. Liu reaffirmed the disgorgement awarded "jointly and severally among the defendants" because "Wang played an integral role" in the illegal scheme.[19] Last month, the Supreme Court declined to consider the appeal from the Ninth Circuit's second opinion.[20]

It remains to be seen whether any courts will impose meaningful limitations on joint and several disgorgement awards under Liu.

Deference to Trial Court Calculations

Appellate courts have continued to show deference to trial courts' disgorgement evaluations, including in determining the legitimacy of expenses. Such opinions do not appear to meaningfully interrogate the calculation — instead often merely affirming the adoption of the SEC's proposed disgorgement award by the district court.

For example, in SEC v. Team Resources Inc., the Fifth Circuit found no abuse of discretion by trial court in denying a defendant a live evidentiary hearing to challenge the SEC's calculation of disgorgement and civil penalties, citing the principle that motions for remedies may be resolved on the papers — which included 500 pages of documentary evidence by the SEC.[21] This holding has been appealed to the Supreme Court.

In SEC v. World Tree Financial, LLC, the Fifth Court rejected an appellate challenge to a disgorgement calculation, noting that "Liu does not require the district court to conduct its own search for business deductions that defendants have not identified."[22]

In August 2022, in SEC v. Yang, the Ninth Circuit affirmed a disgorgement award against a relief defendant, rejecting the contention that "the district court erred by holding that relief defendants are not permitted to deduct legitimate expenses" under Liu.[23] The court agreed that the use of funds raised from investors to pay down a loan in contravention of the offering documents was properly considered an illegitimate expense. Also in August, the Ninth Circuit affirmed the district court's disgorgement calculation upon remand in Liu, holding that the award amount accurately represented "ill-gotten gains" that were "in no way legitimate business expenses."[24]

In July 2022, the Seventh Circuit declined in SEC v. Goulding to reconsider a restitution award made before Liu that the district court deemed "a conservative estimate of the amount by which [defendant's] withdrawals exceeded his contractual entitlements," calling this "the definition of net unjustified proceeds."[25] The court explicitly rejected appellant's argument, pulled from Justice Clarence Thomas' dissent in Liu, that the district court was required to "trace funds from their source to [defendant's] pocket."[26] The Supreme Court denied the petition for certiorari earlier this month.


In the past year, the early trend of deference to the SEC across many of Liu's open questions has continued, particularly when considered in light of the NDAA amendments. The havoc that Liu seemed poised to wreak on the disgorgement remedy appears to have abated.

While meaningful limitations on disgorgement arising from Liu remain elusive, courts may yet create such limits through the still-open questions on the distinction between legal and equitable disgorgement and the circumstances in which disgorged funds can be sent to the Treasury.

Whether related to the strictures of Liu or not, SEC disgorgement awards in fiscal year 2022 — which totaled $2.245 billion — reflected a 6% decrease from 2021, whereas 2022 civil monetary penalties, at $4.194 billion, were the highest on record.[27]

This article was first published in Law360.