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A little over a year ago, the US Supreme Court reaffirmed the SEC’s authority to seek disgorgement as a remedy in enforcement actions, in Liu v. SEC. However, the Court set some parameters on that authority: the disgorgement award can’t exceed the wrongdoer’s net profits and that the money must be returned to the victims. Now, the SEC appears to have established a way to comply with these parameters. This Troutman Pepper memo summarizes a recent holding from the 5th Circuit, which is the first federal appellate court to evaluate a disgorgement remedy post-Liu. Here’s an excerpt:

The order did not impose joint-and-several liability, but instead assessed each defendant’s gain and disgorgement amount. The SEC also identified victims and created a process to return disgorged funds to them. Under the district court’s supervision, any funds recovered will go to the SEC, acting as a de facto trustee. The SEC will disburse those funds to victims, but only after district court approval. The Fifth Circuit found that the process outlined by the SEC satisfied the standards articulated in Liu.

The Blackburn decision provides a roadmap for how the SEC may pursue disgorgement and comply with the new limitations. When the SEC seeks disgorgement in future matters, it will likely abide by a similar process and identify specific victims to whom disgorgement funds will be disbursed.

– Liz Dunshee