In the first of what may be a series of statutory interpretation cases that go to the heart of separation of powers, the U.S. Supreme Court on June 22 decided Liu v. Securities and Exchange Commission, in which it validated the SEC’s authority to pursue disgorgement in federal court, albeit with minor qualifications.
Beginning with Securities and Exchange Commission v. Texas Gulf Sulphur Co., the SEC has relied on the power of a court sitting in equity to grant supplemental relief on top of the SEC’s statutory authority to seek civil penalties, succeeding in obtaining billions of dollars in disgorgement penalties, ranging from $2.5–$3 billion annually from 2015 to 2018. Of these billions, only a portion, ranging from $0.1–$1.1 billion annually over that time period, has been returned to investors. But even so, Congress did not expressly authorize this.
In 2002, as part of the Sarbanes-Oxley Act, Congress authorized the SEC to seek “any equitable relief that may be appropriate or necessary for the benefit of investors.” Congress did not define “equitable relief” or “necessary for the benefit of investors,” leaving the courts to determine whether 15 U.S.C. § 78u(d)(5) allows disgorgement without a return of assets to investors.
The Supreme Court’s holding that disgorgement, a relative newcomer in the stable of remedies, is equitable relief not only expands the authority conveyed by Congress but also imperils other statutes vulnerable to expansive interpretations.
The road to multi-billion-dollar enforcement actions has been long and deliberate. Relying on a WWII-era case, Porter v. Warner Holding Co., the SEC, beginning in 1970 with Texas Gulf Sulpher, convinced courts to let it pursue monetary awards in the name of equity. This expanded power relied on two forms of inherent court authority. The first was the court’s inherent authority to order “ancillary relief” to effect an injunction, for example, by appointing a receiver. The second was the court’s general equitable power to grant “complete relief,” for example, by awarding restitution. These inherent powers, taken together, were deemed to provide the SEC authority, per Texas Gulf Sulpher, to “seek other than injunctive relief in order to effectuate the purposes of the Act.”
There are several problems with this approach. The most obvious one, and the question before the Court in Liu, was whether the SEC can obtain disgorgement awards when its statutory authority allows it to seek only injunctions, certain civil monetary penalties, and equitable relief—but not any other type of monetary award, regardless of the label.
In addition, lower court precedent relying on Porter appears to have misread that case in which the Court granted ancillary monetary relief under its equitable power to award complete relief, but did not purport to create a new genre of equitable relief in the form of personal liability for potentially vast monetary judgments. Thus, relying on Porter’s ancillary award of legal damages as the basis for “equitable monetary relief” is simply mistaken. In addition, the Court’s ruling in Kokesh v. SEC that disgorgement in SEC cases is a penalty, is inconsistent with the notion that such disgorgement is a form of equity.
Liu presented the Court with the opportunity to enforce the plain language of the statutes, uphold the separation of powers, and clarify messy precedent that has expanded the power of several agencies. The Court did the opposite, jettisoning the protections of traditional equitable remedies and replacing them with a set of principles that mimic equity but that lack the traditional rigor. Justice Thomas was the lone dissenter and would have enforced the statute as written.
It is still to be determined how the Liu opinion will affect the cert petitions in Publishers Business Services, Inc. v. FTC, AMG Capital Management, LLC v. FTC, and FTC v. Credit Bureau Center LLC. These petitions, pending for months, deal with the FTC’s similar approach to seeking extra-statutory monetary awards by demanding “equitable monetary relief” despite having no statutory authority to do so. Like the SEC, the FTC has obtained billions of dollars in monetary awards that Congress did not expressly authorize.
From a textual standpoint, the FTC cases are stronger and more straightforward than Liu because, where the SEC could point to statutory authority to seek “appropriate or necessary” equitable relief, the Federal Trade Commission Act (FTCA) includes no such authority. Instead, Section 13 of the FTCA limits the FTC to seeking a temporary restraining order or, in “proper cases,” an injunction. Thus, unlike in Liu, the FTC cases do not turn on whether “disgorgement” is an equitable remedy—equitable or not, that statute plainly does not authorize the FTC to pursue it.
Agencies are creatures of statute and have only those powers that Congress conferred upon them. By discovering new forms of equity that allow for billions of dollars in monetary awards beyond what Congress authorized, the Court risks blurring the separation of powers and assisting enterprising agencies in expanding their authority. That is what the Court did here in Liu. The pending FTC cases provide another opportunity for the Court to apply the statute as written, curtail agency overreach, and uphold the separation of powers.
*Americans for Prosperity Foundation filed an amicus brief in support of Petitioners, highlighting the separation-of-powers violation the Court created by allowing the SEC’s extra-statutory monetary awards; the associated threat to individual rights by bypassing the tripartite constitutional structure of government; and presenting an array of other agencies that have exploited SEC precedent to expand their own authority to seek monetary damages beyond their statutory limits.
Editor’s Note: The Federalist Society hosted a Courthouse Steps Decision Teleforum on Liu v. SEC on June 24, 2020. See here for more information and to listen to the podcast.