SEC’s powers to recoup money hit by Supreme Court

Justin Freeman
Entrance of the Supreme Court

The powers of a leading US regulator to recoup money lost in cases have been limited somewhat by the country’s highest court.

The Securities and Exchange Commission (SEC) was told by the US Supreme Court that it would now have to limit the amount it charges in disgorgements.

However, the court also ruled that the SEC is still permitted to ask the court to charge disgorgements overall.

The decision, which could have significant consequences in cases of cryptocurrency fraud, was made by eight votes to one.

The majority opinion was delivered by Justice Sonia Sotomayor, who is widely known for being a liberal voice on the court.

“Whether it is called restitution, an accounting, or disgorgement, the equitable remedy that deprives wrongdoers of their net profits from unlawful activity reflects both the foundational principle that

‘it would be inequitable that [a wrongdoer] should make a profit out of his own wrong,’” the judgement read.

It went on to cite a case known as Root v. Railway Co.

It also emphasised “the countervailing equitable principle that the wrongdoer should not be punished by ‘pay[ing] more than a fair compensation to the person wronged,’” and in that instance quoted the case of Tilghman v. Proctor.

The opinion, which was later published online, went on to explain some more information about how courts should go about applying disgorgement requests in the future.

“Courts may not enter disgorgement awards that exceed the gains ‘made upon any business or investment, when both the receipts and payments are taken into the account,’” it said.

It added: “When the ‘entire profit of a business or undertaking’ results from the wrongdoing, a defendant may be denied ‘inequitable deductions’. Accordingly, courts must deduct legitimate expenses before awarding disgorgement under §78u(d)(5).”

Question marks have existed for some time over the exact extent to which the SEC is permitted to ask for disgorgements.

The term “disgorge” is generally understood in this context to mean a requirement for a body to release money.

However, the uncertainties around it were flagged by Clarence Thomas, the judge who provided the dissenting opinion.

“The majority’s treatment of disgorgement as an equitable remedy threatens great mischief,” he said.

“The term disgorgement itself invites abuse because it is a word with no fixed meaning.”

He added that it was important to consider where the cash taken from wrongdoers went.

“The award should be used to compensate victims, not to enrich the government,” he said.

“The money ordered to be paid as disgorgement in no sense belongs to the government, and the majority cites no authority allowing a government agency to keep equitable relief for a wrong done to a third party,” he added.

The case that brought the incident to the court’s attention is believed to have been that of Xin Wang and Charles Li, who were accused of misappropriation in relation to an investment scheme.

In that case, the pair were told by a court that they had to disgorge a six-figure sum.


Justin Freeman

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