Supreme Court Upholds SEC’s Authority to Collect Disgorgement
The Supreme Court delivered a victory to the SEC in a ruling that upholds the agency’s authority to seek disgorgement in enforcement proceedings. The Court held 8-1, with Justice Thomas dissenting, that a disgorgement award not in excess of a wrongdoer’s net profits and awarded for the benefit of victims is permissible under federal law. The ruling, however, requires the SEC to determine how much of a defendant’s proceeds were “net profits” and to consider a defendant’s legitimate business expenses in determining the disgorgement amount, which limits agency’s power according to observers quoted in the Wall Street Journal. In the case, the petitioners had solicited foreign nationals to invest in the construction of a cancer-treatment center but misappropriated much of the funds in violation of the terms of a private offering memorandum, the SEC found. The SEC brought a civil action and sought disgorgement equal to the full amount petitioners had raised from investors but the petitioners argued that the disgorgement remedy failed to account for their legitimate business expenses. Lawyers from Goodwin dissected the decision in a client alert available here.