Supreme Court Holds SEC Can Recoup Money in Fraud Cases

June 22, 2020 by Dan McCue

WASHINGTON – With decisions in several high profile cases pending — including one on whether President Donald Trump can shield his financial records from Congressional scrutiny —  the U.S. Supreme court on Monday opted to rule on a case with quite a bit lower profile.

By an 8-1 vote, the justices affirmed the Securities and Exchange Commission’s ability to recover money in securities fraud cases through a process known as disgorgement.

Monday’s ruling was the second time in three years that the Supreme Court has weighed in on how the SEC treats wrong-doers.

In 2017, it unanimously limited the agency’s ability to go after profits where alleged fraud has been going on for years before authorities filed charges.

But that case left open the question the high court answered Monday, that courts have the authority to order disgorgement of profits.

Last year alone the mechanism enabled the SEC to collect $3.2 billion in ill-gotten gains from people found to violate securities.

Writing for the majority, Justice Sonia Sotomayor pointed out that Congress has not defined what falls under the umbrella of “equitable relief” for investors, leaving it to the courts to consider which remedies the SEC may impose as part of its powers.

“The Court holds today that a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible” under federal law, Sotomayor wrote.

In a lengthy dissent, Justice Clarence Thomas said the majority’s treatment of disgorgement as an equitable remedy “threatens great mischief.”

Central to his argument is that he considers “disgorgement”  to be a “20th Century invention,” and, as an initial matter, it is not even clear what ‘disgorgement’ means. The majority frankly acknowledges its ‘”protean character.'”

Thomas contrasts this to “accounting” which he calls a distinct form of relief with a well-accepted definition.

The justice also faulted the majority for allowing the government to keep the ill-gotten gains it seizes. “The award should be used to compensate victims, not to enrich the Government,” he wrote.

“Requiring the SEC to only ‘generally’ compensate victims, is inconsistent with traditional equitable principles,” he added.

“Worse still from a practical standpoint, the majority provides almost no guidance to the lower courts about how to resolve this question on remand,” Thomas continued. “Even assuming that disgorgement is ‘equitable relief’ … and that the Government may sometimes keep the money, the Court should at least do more to identify the circumstances in which the Government may keep the money. Instead, the Court asks lower courts to improvise a solution.

“If past is prologue, this uncertainty is sure to create opportunities for the SEC to continue exercising unlawful power,” he concluded.

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