Opinion analysis: Justices accept, but cabin, SEC’s right to disgorgement in securities litigation

Link to plain English analysis.


Link to Opinion of the Court.

Holding : In a Securities and Exchange Commission enforcement action, a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under 15 U.S.C. § 78u(d)(5).

Judgment : Vacated and remanded, 8-1, in an opinion by Justice Sotomayor on June 22, 2020. Justice Thomas filed a dissenting opinion.

I support the reasonable interpretation of the equity power as opined by Justice Sotomayor and supported by an 8 Justice majority. I think Justice Thomas takes an unrealistically rigid view of the equity power of federal courts.

Prior to this decision, lower Federal Courts were taking a VERY expansive view of the equity power and granted very liberal disgorgement orders in favor of the SEC.

The Supreme Court narrowed that view to some extent. Federal Courts may now only order disgorgement of that portion of ill gotten gains that amounts to net profits and may not order disgorgement of the portion of ill gotten gains that were used for legitimate expenses.

The Supreme Court found that overly large disgorgement awards amounted to a penalty, which is outside the traditional equity power of the Federal Courts. Penalties may only be properly assessed at law, not at equity.

This was the only decision released on Monday, June 22. The order list had no new grants.