Courthouse Steps Decision Teleforum: Liu v. SEC

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On Monday, the Supreme Court released its decision in Liu v. SEC. By a vote of 8-1, the judgment of the U.S. Court of Appeals for the Ninth Circuit was vacated and the case remanded. Justice Sotomayor's majority opinion was joined by all other members of the Court except Justice Thomas, who dissented. Todd Braunstein will discuss the decision and offer commentary.


Todd F. Braunstein, General Counsel - International, Willis Towers Watson


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Event Transcript



Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at



Nick Marr:  Welcome to The Federalist Society's Teleforum conference call. This afternoon will be a Courthouse Steps Decision Teleforum on the Supreme Court’s June 22nd ruling in Liu v. Securities and Exchange Commission. My name is Nick Marr, and I'm the Assistant Director of Practice Groups at The Federalist Society.


      As always, please note that all expressions of opinion are those of the expert on today's call.


      Today we are fortunate to have with us Todd Braunstein, General Counsel - International at Willis Towers Watson. After our speaker gives his opening remarks, we will then go to audience Q&A. Thanks for being with us today. Todd, the floor is yours.


Todd F. Braunstein:  Thanks very much, and thanks to The Federalist Society for inviting me to do this Teleforum. On Monday, the Supreme Court decided Liu v. Securities and Exchange Commission, an important case affecting remedial powers of the Securities and Exchange Commission. In an 8-1 decision, the Court held that the Commission has statutory power to seek disgorgement of a wrongdoer’s profits in federal court, albeit in a less robust form than the Commission had sought.


      The decision does represent, at least, a partial win for the Commission. To be sure, all nine justices rejected the Commission’s request that the Supreme Court affirm the lower court’s broad disgorgement order. So the Commission technically lost the proverbial battle. But it did pull out, at least, a partial victory in the larger war by having its authority to seek disgorgement affirmed when that outcome was by no means a forgone conclusion.


      However, the opinion raised almost as many questions as it answered. And it did this quite self-consciously. Courts and litigants could well spend years trying to piece together answers to some of these questions, as I’ll talk about in more detail a bit later.


      But before doing that, let me give a bit of background on the issue and on the case. Disgorgement is a remedy under which a defendant is forced to give up his ill-gotten gains. For the SEC, it’s been one of its most powerful tools, both in federal court and in the SEC’s own administrative proceedings. Just by way of example, in Fiscal Year 2019, parties to Commission enforcement proceedings, in either both judicial proceedings and administrative proceedings, were ordered to pay a total of $3.25 billion in disgorgement as compared to $1.1 billion in civil penalties.


      But despite the widespread usage of disgorgement, there is no statute that expressly authorizes federal courts to order it in SEC enforcement actions. When disgorgement orders first began appearing in SEC enforcement actions, some 50 years ago, the only remedy that the Commission had express authority to seek from the courts was an injunction. And although there was no specific statutory basis for disgorgement, courts ordered disgorgement anyway, citing their inherent equity power to grant relief ancillary to injunctions.


      Over the years, Congress gradually expanded the remedy that the SEC was authorized by statute to seek in federal court. And in 2002, as part of the Sarbanes-Oxley Act, Congress passed the language at issue here that the SEC relied on in seeking disgorgement. And that language states, in pertinent part, as follows: “In any action or proceeding brought or instituted by the Commission under any provision of the securities laws… any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors.” In this statute, Congress identified what qualified as equitable relief, and so there was an open question whether or not this authorized disgorgement as the SEC had been seeking it in the proceeding decades.


      Three years ago, in 2017, in Kokesh v. SEC, the Supreme Court held that disgorgement, as the SEC had been seeking it, constitutes a penalty for purposes of the statute of limitations provision that governed enforcement of any “civil fine, penalty, or forfeiture.” In the Kokesh decision, Justice Sotomayor’s opinion included a footnote stating that the Court was expressing no opinion on the antecedent question of whether courts have authority to order disgorgement in the first place in SEC enforcement proceedings, or whether the courts had properly applied disgorgement principles in SEC enforcement proceedings.


      And this footnote meant that a challenge to the SEC’s disgorgement authority in federal court was inevitable. And that challenge came with the Liu decision, which resolved the issue, at least in part.


      And writing for an eight-justice majority, Justice Sotomayor confirmed the language I quoted earlier, which authorizes the SEC to seek “equitable relief” in federal court does encompass disgorgement. Or at least it does so where the disgorgement does not exceed the defendant’s net profits from an unlawful scheme and where the funds that the government collects are then awarded to victims.


      The opinion said that its methodology in interpreting this language was to determine whether the remedy it was analyzing fell into one of the categories of relief that were typically available in equity historically. And the Court surveyed works of equity jurisprudence, and it identified two principles that it said were key to deciding the case.


      The first principle is that in equity -- or actually, courts are allowed to or are authorized to strip wrongdoers of their ill-gotten gains. The second principle was that this remedy needs to be limited to an individual wrongdoer’s net profits to be awarded to victims.


      Regarding the first principle about stripping wrongdoers of ill-gotten gains, the Court observed that it’s a foundational principle of equity that a wrongdoer should not profit from his own wrong. While the term disgorgement is of relatively recent vintage, the Court did not find this particularly significant, given that the disgorgement remedy—stripping wrongdoers of ill-gotten gains—had parallels to other remedies that were available historically. And the Court pointed most notably to the remedy of accounting which adhered to the same principles and was much more time tested.


      Regarding the second principle, which is the limits on the remedy, the Court observed there were multiple such restrictions. The purpose of these was to avoid turning accounting or disgorgement, or stripping the wrongdoer of ill-gotten gains, into a punitive sanction – a punitive sanction being something that equity does not count against. The Court walked through some of those traditional limitations in equity. One limitation is that the remedy typically imposed a constructive trust on wrongful gains, so that the funds are hailed by the wrongdoer for the benefit of the wrong victim, as opposed to the benefit of the public fisc or some other public interest.


      A second limitation is that the remedy was typically limited to net profits from wrongdoing. That is the gains from any business or investment where both receipts and expenses are taken into account.


      Finally, historically, the remedy was generally awarded against individuals or against partners engaged in concerted wrongdoing, not against multiple wrongdoers on joint-and-several liability theory.


      So after walking through those principles, the Court rejected the position that the Liu case had been decided by Kokesh, which, again, has said that the SEC’s disgorgement effort amounts to a penalty for purposes of the statute of limitations. The Court said that Kokesh evaluated “eversion of the SEC’s disgorgement remedy that seemed to exceed the bounds of traditional equitable principles.” But the Court held that Kokesh had no bearing on the Commission’s ability to employ a more limited version of the remedy in the future, and that is what the Court has now said the SEC may do.


      The Court then remanded the case to the Ninth Circuit for further proceedings, consistent with the opinion. And for future reference, both in the lower courts in the Liu case and for other lower courts deciding future cases, it gives some limited guidance on the three ways in which it was restricting the SEC’s disgorgement remedy.


      First, with regard to the requirement that funds be returned to victims, the Court pointed to the language in the statute that the “equitable relief” that the Commission is authorized to seek must be “appropriate or necessary for the benefit of investors.” The Court said that this will “generally require the SEC to return gains to wronged investors for their benefit.” And I’ll come back to talk a little bit more about this point in a few minutes.


      Second, on the joint-and-several liability point, the Court said that joint-and-several liability is generally inappropriate. It can be acceptable—joint-and-several liability, that is—to impose on partners who are engaged in concerted wrongdoing. The Court said that it is something that was done historically in equity. But as for other types of concerted wrongdoing, the Court simply said that there’s a wide range of relationships that could be at issue, from arm’s length to much more close partnerships. And the Court didn’t see the need to delve further into whether joint-and-several liability might be available for a particular kind of relationships.


      Third, regarding the requirement that courts should deduct legitimate expenses before ordering disgorgement. The Court held or observed there has historically been an exception in the situation where the entire profit results from wrongdoing. And in that situation, equity had denied defendants inequitable deductions, such as for personal services. Even when this exception applied, that is even when courts are allowed to order defendants to disgorge something other than net profits, the courts are supposed to ascertain whether expenses or legitimate expenses are simply wrongful gains under another name.


      So that was the Court’s opinion. Justice Thomas filed a solo dissent. He would’ve held that even the limited form of disgorgement, okayed by the majority, was not authorized by this statute. On the basis that it was not a recognized, traditional form of equitable relief. Justice Thomas observed that there was no such thing as disgorgement available in the English Court of Chancery and that the term disgorgement was not even really used until the 1960s and 1970s. Justice Thomas observed that even today it is unclear what disgorgement means, and that this uncertainty was a concerning aspect of the Court’s opinion and made the future use of this remedy ripe for mischief.


      So having gone through this summary, let me make a few observations about the opinion and its implications for the future. The first observation is about the Court’s interpretive methodology. As I mentioned earlier, when disgorgement orders first appeared in SEC enforcement actions half a century ago, there wasn’t any specific statutory authorization for this. And instead, the courts relied on their inherent equity power to grant relief ancillary to remedy that had been authorized, which were injections. In this week’s opinion, there was no hint of any sympathy to that line of thinking; that is, no hint of any sympathy for broad remedial powers untethered to any statutory grant. And that may not have been surprising given the last couple decades of American jurisprudence, but it is worth emphasizing.


      Instead, Justice Sotomayor’s opinion reflects really a careful reading of the statutory text. And since that statutory text used the phrase “equitable relief,” which is a term with a rich, historical pedigree, the opinion carefully surveyed the history of how equitable relief was traditionally awarded. And one can disagree with how Justice Sotomayor chose to read the history and that’s what Justice Thomas did precisely in his dissent, but it’s still notable that one of the more liberal justices—quote/unquote, “liberal justices”—adopted this methodology. And I should add that the fact that she chose this methodology and had eight justices join it was not necessarily a forgone conclusion. It would’ve been fairly straightforward, actually, for Justice Sotomayor to have written an opinion saying that the statutory text here was intended to incorporate a more moderate understanding of the SEC’s disgorgement powers; in other words, that the statute had codified a range of lower court decisions adopting an expansive reading of the SEC’s disgorgement powers that was not particularly tethered to traditional equitable remedies.


      And, indeed, the government in its briefing, developed this argument at great length. But the Court specifically rejected this effort, choosing instead to look more broadly at the history of equitable relief.


      So my second observation about the opinion has to do with the Court’s treatment of the SEC. And to sort of understate it just a little bit, the Commission has had a real rough go of it in recent years when litigating cases at the Supreme Court about its remedial authorities. In 2013 in a case called Gabelli v. SEC, the Court rejected the SEC’s attempt in certain cases to toll the statute of limitations for seeking civil penalties. And the Commission lost that case 9-0. I previously mentioned the Kokesh case, which was in 2017, where the Court held that the Commission was subject to a five-year statute of limitations when it sought disgorgement in federal court. And, again, the Commission lost that case 9-0 as well.


      In the Liu case, decided two days ago, the Commission could also be said to have lost 9-0 as well, in the sense that all nine justices, including Justice Thomas, rejected the Commission’s efforts to affirm the lower court’s broad disgorgement order. Now, this way of looking at the case is a bit unfair to the SEC as we think about Liu in the broader context of the Supreme Court’s recent SEC jurisprudence. And I say that because going into this case, there was good reason to think that the disgorgement remedy wouldn’t survive at all. For instance, in oral argument in Kokesh, several justices had been openly skeptical of whether disgorgement was proper. Just to give two examples, Chief Justice Roberts commented, during the Kokesh oral argument, that the SEC “devised its remedy without any support from Congress.” And Justice Gorsuch said of the disgorgement remedy, “There’s no statute governing it. We’re just making it up.”


      So not surprisingly, in the Liu case, the petitioner expends enormous amounts of energy trying to persuade the Court that the disgorgement remedy shouldn’t survive at all. So the fact that the Commission emerges from Liu with a form of disgorgement remedy could be viewed as something of a win. They may have technically lost the battle but they didn’t lose the war. And it could be argued that they won the war because the really prevailed on the fundamental issue at the heart of the case.


      With all of that said, the Commission really can take a great deal of comfort from this 9-0 result. To the 9-0 result, there are new limitations on a remedy it has employed for decades. And some of the language used by the justices is also fairly critical of the Commission. The majority opinion, I think, could be seen as lightly chastising the SEC. It noted that over the years the SEC’s disgorgement remedy had occasionally drifted from its statute authorization in taking on features that were in “considerable tension with equity practices.” Justice Thomas in dissent was more pointed. He noted some of the doctrinal uncertainties that went unaddressed by the Court’s opinion, which I’ll talk about in more detail in a second. And then he commented, “If past is prologue, this uncertainty is sure to create opportunities for the SEC to continue exercising unlawful power.”


      So let me turn now to my third comment, and probably most important observation, about the Liu opinion, which relates to the ramifications of this opinion for the courts, for the Commission, and for the business community. The opinion left a number of questions unanswered, and it did this quite self-consciously. And as a result, courts and litigants may struggle to interpret and apply the guidance that’s been given. To take the most notable example, the opinion stated that the disgorgement remedy “generally requires the SEC to return defendant’s gains to wronged investors.” And that’s in contrast to the SEC’s previous practice in many cases of simply depositing disgorged funds into the Treasury.


      In arguing its case before the Court, the government had taken the position that merely depriving a wrongdoer of ill-gotten gains would satisfy the statutory test that equitable relief must be “for the benefit of investors.” But the Court rejected this position and said no, it’s got to be something more than merely depriving the wrongdoer of ill-gotten gains. It’s got to be something on top of that.


      So although the Court said that “generally, you have to return” language to the victim, the Court did not squarely take the view that the Commission must always return funds to victims. It used the general language but then set out what the exceptions might be. And that leaves some uncertainty in how the Commission, the courts, and litigants should think about a couple of fairly common scenarios.


      One scenario is SEC enforcement actions where there is no identifiable class of victims. For instance, cases under the Foreign Corrupt Practices Act, which the government itself in oral argument put into -- placed into the category of statutes without an identifiable class of victims. Some of the SEC’s largest disgorgement settlements in recent years have been in the context of Foreign Corrupt Practices Act cases, and the amounts can routinely go into the tens of millions of dollars and sometimes into the hundreds of millions of dollars.


      A second common scenario where there is now uncertainty is enforcement actions where there’s a large class of victims and it is not practical to identify them or return funds to them. The Court did pass on this issue, if only to say that it didn’t see the need to address it to decide the case. It said that it is “an open question whether and to what extent the practice of depositing disgorged funds to the Treasury would satisfy the statutory test when it’s not feasible to return it to investors.” And more generally, it declined to take a view on whether the feasibility of returning funds to investors is relevant to the application of equitable principles.


      So going forward, it is very unclear whether courts now have the ability to order disgorgement in Foreign Corrupt Practices Act cases or cases involving large classes of victims where they can’t be identified or where it’s not feasible to return the funds. And given the amounts of money that are involved, this subject seems sure to be hotly contested in future litigation on this issue. And as I mentioned, the questions about where the funds go was not the only unanswered question raised by this opinion. I mentioned that the disgorgement remedy, according to the Court, should only take account of the defendant’s profits. But, again, the Court acknowledged there needs to be exceptions to this rule. For example, when the entire profit of a business results from wrongdoing. And in that case, the court is allowed to look at whether individual expenses are legitimate or not.


      And similarly, the Court said that it was “generally (the rule that the disgorgement remedy should apply only to) individuals or partners engaged in concerted wrongdoing,” and that therefore joint-and-several liability is clearly the exception added in the rule. But, again, the Court went on to observe that equity did permit some flexibility imposing collective liability, including in the case of partners, and given the wide spectrum of potential relationships, the Court did feel the need to pass on them, and therefore it can become a subject of uncertainty and future litigation.


      A final unanswered question from the Liu opinion is whether the limitations announced on the disgorgement remedy in federal courts apply only in federal courts or also when the Commission seeks disgorgement in an administrative proceeding. The posture of today’s case was, or rather in this week’s case, was federal court. But obviously, the Commission does have the authority to seek disgorgement in administrative proceedings. And Justice Thomas raised the question in his dissent whether or not the limits announced in Liu apply in administrative proceedings. And the Court just simply didn’t answer it.


      The Court in the Liu decision was interpreting a different statute than will apply in administrative proceedings. The statute governing judicial proceedings talks about equitable remedies, whereas the statute governing administrative proceedings does specifically talk about something called disgorgement. So in principle, it is possible for courts to treat the administrative remedy as being more expansive than judicial remedy, but it’s just not clear whether or not the Court will go in that direction.


      So that’s about all I have in terms of my prepared remarks about Liu v. SEC. With that, I’m certainly happy to take any questions you may have.


Nick Marr:  Great. Thanks, Todd. All right. Let’s go to audience questions.


      And just to kick us off, Todd, I have a question of my own. How do you see this opinion affecting the SEC’s overall enforcement efforts? Or going forward, you said there was -- it’s not exactly clear. There’re a lot of questions left unanswered by the Court.


Todd F. Braunstein:  Well, look, the decision definitely has an impact on the SEC’s ability to pursue robust enforcement in federal court. It certainly trims the amount the SEC can seek, and therefore, its ability to get some of these eye-popping settlement amounts we’ve seen in recent years.


      That having been said, I’m not sure the overall impact on the overall enforcement program is going to be that significant. It may depend on future developments, future judicial developments. And in particular, we’ve obviously seen this trend in recent years where the SEC is bringing more enforcement actions administratively, and the SEC retains its authority to seek disgorgement administratively. For the time being at least, that power remains unaffected. If the courts decide that the reasoning of the Liu decision applies to the administrative form of disgorgement as much as it does to the judicial form of disgorgement, that can certainly have a very significant impact on the SEC’s enforcement program.


      For the time being, though, it seems likely that it will only accelerate the trend of bringing more cases administratively so that the SEC can take advantage of what it will surely assert as being its more robust disgorgement remedy in its administrative proceedings.


Nick Marr:  I see. Great. All right, we’ll go to the first question now.


Bob Fitzpatrick:  Hi. Bob Fitzpatrick in D.C. I think I know the answer to this question, and it’s probably stupid, but I’ll ask it anyway. I assume this opinion has no application to any other federal statute unless the statute in its remedies section has the word disgorgement or something comparable to that. Is that correct?


Todd F. Braunstein:  So this statute actually -- what’s interesting about this is that it wasn’t interpreting the word disgorgement. It was interpreting a grant of power to talk about “equitable remedies” for the benefit of investors. And so I think it is fair to say that where courts are construing other grants of power than may make reference to “equitable remedies,” it was have, at a minimum, a persuasive effect of interpretive methodology, in particular the fact that all nine justices looked at -- went back the English Court of Chancery and how equity -- equitable practices applied over the centuries. That is an interpretive choice they have made in previous cases but they reaffirmed this year. And so it would have that effect in other contexts where Congress has talked about “equitable remedies” or “equitable relief.”


      So since the word disgorgement itself was not something the Court construed, it may actually not have particular effect in situations where Congress used the word disgorgement. So I mentioned the SEC’s administrative proceedings where they did use the term disgorgement, and one can imagine that the Commission will take the position that since Congress used the word disgorgement in that statute, it must mean something different from what the Court talked about today. I would fully expect the SEC to take that position. And litigants, of course, will take the opposite position, or defendants will take the opposite position.


Nick Marr:  Todd, we’ll go to the next question here.


Caller 2:  Hi, my name is [inaudible 26:42] and I’m from Santa Fe, New Mexico. I didn’t actually have a question. I just wanted to complement Mr. Braunstein on what I thought was a really excellent, clear presentation. I was very impressed with the way you explained the decision, something that isn’t necessarily my area, but I thought you did a great job. That’s all I wanted to say is just congratulations. It was quite terrific. Thanks.


Todd F. Braunstein:  Thanks so much, and I’ll give you your $10 after the call. [Laughter]


Nick Marr:  Thank you, caller. Todd, we don’t have any pending questions at this moment. Do you have -- oh, actually we do have one. Area --


Bob Fitzpatrick:  This is Bob Fitzpatrick, again. I got muted when you were giving your answer. And it turns out I guess I'm dead wrong. So I'm an employment lawyer and Title VII, for example, has, as I recall, some pretty strong language about equitable relief. Can I see plaintiff lawyers arguing for disgorgement of profits that are approximately caused by, for example, discriminatory conduct? Or is that just totally off the wall?


Todd F. Braunstein:  Well, without looking at the specific statute, it’s a little hard to comment. In the Liu decision, the Court talked about -- the statute at issue talked about equitable relief that is appropriate for the benefit of investors. And Justice Sotomayor’s opinion took some pains to say that that isn’t the same thing as a free-standing grant of all equitable relief. She actually made a point of saying we have to give effect to every word of the statute, and therefore, this language needs to mean something. There needs to be some kind of limitation on that. Now, I’m not familiar with, notwithstanding all the discussion of Title VII over the last week or so -- so I don't know enough about Title VII to comment on the “equitable relief” that --


      What I think probably is fair to say is that to the extent that Congress used that phrase, and to the extent that they haven’t -- the Court hasn’t already interpreted what that language means, the clear message from this opinion that all nine justices agreed on is that when you’re looking at equitable relief, you look at what was available historically in the Court of Chancery and in equitable courts from the time of the Founding forward. And that’s the methodology you use. So whether or not that would mean disgorgement in employment law cases, I’m not really sure. But at least that would be where you would start methodologically if you’re running on a blank slate at least.


Bob Fitzpatrick:  Thank you very much. I appreciate it.


Todd F. Braunstein:  Sure.


Nick Marr:  All right. Todd, we don’t have any questions pending right now.


Todd F. Braunstein:  Sure, I think the decision -- I was at oral argument for the decision. The decision was absolutely not a surprise given what the justices did the thrust of the questioning at oral argument. It was clear that the justices were looking for a kind of middle ground, in between what the maximum position adopted was by the SEC where disgorgement didn’t necessarily include net profits and didn’t have to go to victims, versus the position urged by the petitioners to eliminate the disgorgement remedy altogether. And so the position was not a surprise in that sense. It’s got something for the Commission to like in that it kept the remedy. It’s got something for the Commission not like – really very much a middle ground in that sense.


      But I think a really interesting opinion, and it’ll be interesting to see how the interpretive questions I mentioned play out in the coming years.


Nick Marr:  Great. Thank you, Todd. Thanks so much for joining us. On behalf of The Federalist Society, I want to thank our expert for the benefit of his valuable time and expertise today. We welcome listener feedback by email at [email protected]. Thank you all for joining us today. We are adjourned.




Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at