Liu v. SEC Decision Leaves Ambiguity on Disgorgement Limitations – How to Measure ‘Business Expenses’ Deductible From ‘Illegal Profits’

While the U.S. Supreme Court’s decision in Liu v. SEC limited the SEC’s disgorgement power, it also left open certain complicated issues that are now subject to interpretation. As we previously summarized, in an 8–1 vote, the Court held that disgorgement is a permissible equitable remedy for securities fraud under § 78u(d)(5), provided the amount does not exceed a wrongdoer’s net profits and the money is returned to harmed investors.

The Court focused on the broad question of whether disgorgement qualifies as equitable relief and chose not to decide three narrower issues raised by the petitioners as to why their nearly $27 million disgorgement order crossed the bounds of traditional equity practice, namely, it failed to return money to victims, did not deduct business expenses, and imposed joint-and-several liability. While the Court did not decide those issues, it provided principles to guide the lower courts on remand.

Below, we explore the Court’s guidance and resultant ambiguity on two issues:

1. What qualifies as a “legitimate” business expense deductible from disgorgement?
2. When are defendants “partners in wrongdoing” for purposes of collective liability?