Equity, Punishment, and the Company You Keep: Discerning a Disgorgement Remedy under the Federal Securities Laws

Abstract

Since its inception in 1934, the Securities and Exchange Commission has wielded statutory authority to seek injunctive relief for violations of the federal securities laws. Since 1970 courts have, at the Commission’s behest and without much analysis, ordered violators to disgorge profits – in fact, lots and lots of profits – gained in the course of their wrongdoing. The existence of the disgorgement remedy has been regarded by the lower federal courts as well settled enough so as to result in SEC disgorgement recoveries of over $2.9 billion in 2017 alone. In that same year, however, the legitimacy of the remedy was cast into doubt by a footnote in Kokesh v. SEC, a Supreme Court case holding that disgorgement was punitive and thus a penalty for purposes of a statute imposing a five-year statute of limitations on government actions seeking penalties, forfeitures, and fines. The lower federal courts already are grappling with the fall-out as defendants in actions for disgorgement brought by the SEC and other agencies are making invocation of the illegitimacy issue de rigueur.

Although Congress has never explicitly authorized the disgorgement remedy it has alluded to it several times, both in legislative history and in various statutory provisions that clearly assume its existence. Nonetheless, some commentators take the position that without express authorization disgorgement cannot exist as a legal remedy. They also have taken the position that it cannot exist as an equitable remedy, insofar as the Supreme Court has labeled it as a punishment.

This article begs to differ. It challenges the promiscuous use of the word “equitable,” which appears to have greatly complicated any attempt to make sense of disgorgement. The confusion resulting from a sea of unexamined assumptions about “equity” that floats throughout the relevant cases and commentary has obscured a central issue. This is the difference between whether a remedy exists and whether, if it does, there are constitutional consequences. In the process of shedding light on this subject, this article also establishes that the Commission has the ability to seek disgorgement as an equitable remedy in many of the contexts in which it customarily is pursued. In addition, it demonstrates that the Commission has the power to seek disgorgement as a legal remedy. Finally, it reveals that the characterization as legal or equitable is really only important in determining whether the defendant has a right to jury trial. This is a question that is not practically important if the Commission seeks some additional remedy that clearly carries that right, but in any event it is one that should be determined by Seventh Amendment precedents applied on a case by case basis.

Keywords: disgorgement, remedies, equity, punishment, SEC, securities and exchange commission

JEL Classification: K22