Liu v. SEC, 140 S. Ct. 1936 (2020)
Liu v. SEC is a landmark Supreme Court decision defining the scope of the Securities and Exchange Commission's ability to seek disgorgement in federal court.
Does 15 U.S.C. § 78u(d)(5), which authorizes the SEC to obtain "equitable relief … for the benefit of investors," permit disgorgement in civil enforcement actions, and if so, what equitable limitations constrain such relief?
Under 15 U.S.C. § 78u(d)(5), the SEC may seek equitable relief that is appropriate or necessary for the benefit of investors. Disgorgement qualifies as equitable relief if it is limited to the wrongdoer's net profits (i.e., gross receipts minus legitimate expenses), is generally not imposed on a joint-and-several basis except when defendants act in concert to obtain undivided profits, and is awarded for the benefit of investors—typically by returning funds to victims rather than depositing them in the Treasury. Equitable principles require deduction of legitimate costs and disallow turning disgorgement into a penalty.
Yes. Disgorgement can be awarded as equitable relief under § 78u(d)(5), but only to the extent of a wrongdoer's net profits and for the benefit of investors. The Court vacated and remanded for consideration of whether legitimate expenses should be deducted, whether joint-and-several liability was appropriate given the defendants' relationship and conduct, and whether the award could be structured to benefit investors.
Liu preserves the SEC's ability to seek disgorgement in federal court while meaningfully limiting its scope. For practitioners and students, Liu is a pivotal remedies case: it ties modern federal enforcement to traditional equitable principles, requires careful calculation of net profits, and curtails practices like routine joint-and-several liability and Treasury deposits untethered to investor restitution. It also interacts with Kokesh (limitations period) and subsequent statutory developments, shaping how courts analyze disgorgement in SEC actions and beyond. Post-Liu, litigants must build records on legitimate expenses, individual gain, and feasible victim distribution, and courts must tailor remedies to avoid punitive excess.