Courthouse Steps Oral Argument: Liu v. Securities and Exchange Commission (SEC)

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On March 3, 2020, the Supreme Court will hear oral arguments for the case of Liu v. Securities and Exchange Commission (SEC). At issue is "whether the Securities and Exchange Commission may seek and obtain disgorgement from a court as “equitable relief” for a securities law violation even though the Supreme Court has determined that such disgorgement is a penalty." Todd Braunstein joins us to give perspectives on the oral arguments and offer possibilities for outcomes. 


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



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Event Transcript

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Criminal Law & Procedure Practice Group, was recorded on Wednesday, March 4, 2020, during a live teleforum conference call held exclusively for Federalist Society members.     


Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon’s topic is a Courthouse Steps Oral Argument Teleforum on Liu v. Securities and Exchange Commission. My name is Micah Wallen, 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.


      And today we are fortunate to have with us Todd Braunstein, who is General Counsel of International at Willis Towers Watson. Todd attended the oral argument live yesterday morning. After our speaker gives his opening remarks, we will then go to an audience Q&A. Thank you for sharing with us today. Todd, the floor is yours.


Todd F. Braunstein:  Thanks very much, Micah, and thanks to The Federalist Society for inviting me to give this teleforum. The Securities and Exchange Commission has had a rough run of it in recent years when litigating cases at the Supreme Court about its remedial authorities. In 2013 in Gabelli v. SEC, the Court rejected the SEC’s attempt in certain cases to total the statute of limitations for seeking civil penalties. The Commission lost that case 9-0.


      And then in 2017 in Kokesh v. SEC, the Court held when the Commission seeks disgorgement in federal court, it is subject to a five-year statute of limitations applicable to penalties. Once again, the Commission lost that case 9-0. And the Kokesh case fairly clearly foreshadowed the next battle over the SEC’s remedial authorities.


      Justice Sotomayor’s opinion for the Court in Kokesh, including the footnotes stating that the Court was expressing no opinion on whether the courts actually have underlying authority to order disgorgement in SEC enforcement proceedings, or whether courts have properly applied disgorgement principles in SEC enforcement proceedings. This footnote meant that a challenge to the SEC’s authority to seek disgorgement in federal court was inevitable. And hence, it was no surprise last fall when the Court granted cert on that very issue in Liu v. SEC.


      As Micah mentioned, the Court held oral argument in that case just yesterday. And although the Kokesh opinion itself took no view on whether the SEC has the ability to seek disgorgement in federal court, several of the individual justices had expressed such a view during oral argument in Kokesh. Indeed, no fewer than five of the justices asked counsel in Kokesh whether such authority existed and where it came from. And some of them were notably skeptical that the authority existed. For instance, Chief Justice Roberts commented that the SEC, quote, “devised this remedy . . . without any support from Congress.” Justice Gorsuch was even more skeptical. He observed of this disgorgement that, quote, “There’s no statute governing it. We’re just making it up.”


      So coming into oral argument in the Liu case, given the recent history of lopsided losses and the skepticism of some of the justices in Kokesh, the deck did appear to be stacked against the SEC. But that was actually the surprising this about yesterday’s oral argument. If the questioning was any guide, many of the justices actually did seem to accept that there was a good statutory basis for disgorgement in federal court. Indeed, there even appeared to be something of a consensus, or something approaching a consensus, among the justices that the authority for disgorgement existed and the only question was how to fashion that remedy appropriately.


      Before getting into that, let me discuss some of the background to this case. Disgorgement is defined as a remedy in which the defendant is forced to give up ill-gotten gains when he engages in some kind of wrongdoing that offends the rights of another. Disgorgement has been one of the SEC’s most potent tools, both in federal court and in the SEC’s own administrative proceedings. For example, in Fiscal Year 2019 parties to Commission enforcement proceedings, both in federal court and administratively, ordered to pay $3.240 billion in disgorgement as compared to $1.101 billion in civil penalties. But despite its widespread usage, there is no statute that expressly authorizes courts to order disgorgement in SEC’s enforcement actions in federal court. Or rather no statute that authorizes it expressly in those terms.


      Disgorgement orders first appeared in SEC enforcement actions in the late 1960s and early 1970s. And that was a time when the only remedy the SEC had express authority to seek from the courts was an injunction. And although there wasn’t an express basis for courts to order disgorgement, a number of courts ordered disgorgement anyway in what they called an exercise of their inherent equity power to grant relief ancillary to injunctions. And that theory, under which the early courts in the ‘60s and ‘70s ordered disgorgement, obviously is an expansive reading of judicial power that has obviously fallen very much out of favor in American jurisprudence. And as a result, the SEC certainly was not relying on that theory in the Liu case and other lower-court cases.


      Instead, the SEC pointed to some statutory language that was enacted in 2002 that gives them the power to seek in federal court, quote, “any equitable relief that may be appropriate and necessary for the benefit of investors.” And the SEC’s argument, although this doesn’t specifically mention disgorgement, their argument that it covers disgorgement goes something like this: for a period of decades beginning, again, in the ‘60s and ‘70s, courts did order disgorgement in SEC judicial proceedings as an appropriate exercise under equitable authority. This practice was very common and was affirmed by a large number of courts of appeals and of course was supported by the Commission itself.


      And whether those decisions were rightly decided or wrongly decided, they form an important backdrop for the various statutes that Congress enacted in the ‘80s, ‘90s, and 2000s that laid out the SEC’s enforcement -- or that defined the SEC’s enforcement regime. And hence, according to the SEC, the authorization for, quote, “any equitable relief” that was enacted in 2002, should be understood as including disgorgement. And in further support of that argument, the Commission noted that the Supreme Court itself has described disgorgement as an equitable remedy. And it pointed to examples of Congress classifying disgorgement as an equitable remedy in analogous statutes for the commodity’s future trading commission.


      The Commission also, in its argument in the Supreme Court, noted that there are other statutory provisions in the scheme governing the SEC that explicitly refer to judicial disgorgement. For example, Congress enacted a provision that prohibited private attorney’s fees awards from funds that were disgorged as a result of actions brought by the SEC in federal court. So a provision that very clearly, explicitly presupposes that there is disgorgement that is available in federal court. And the SEC argues that in order to give effect to that language, the phrase has to be read to include disgorgement in federal court.


      And finally, the SEC pointed to history. It observed that historically courts sitting in equity had the ability to grant a remedy called an accounting, which required wrongdoers to surrender profits from their wrongs. Argued that disgorgement is simply the modern form of accounting, and as a result, when Congress used the phrase, quote, “any equitable relief,” it very plausibly could’ve been understood as authorizing disgorgement in federal court.


      The petitioner, Mr. Liu, attacked the SEC’s reasoning by arguing, obviously, that disgorgement can’t plausibly be derived from authorization to seek equitable relief. And his principle argument was syllogism that relied heavily on the 2017 decision in Kokesh.


      First, the Court held unanimously in Kokesh that the SEC’s disgorgement remedy was a penalty. Second, equitable jurisdiction does not authorize penalties. You can’t use equity to obtain penalties. And therefore, the phrase “equitable relief” can’t be read as authorizing disgorgement.


      So in regarding the phrase prong of the syllogism, Kokesh held, again unanimously, that disgorgement in SEC action bears all the hallmarks of a penalty. First, that the SEC disgorgement imposed has a consequence of violating a public law as opposed to a wrong against an individual. Second, the Court observed in Kokesh that SEC disgorgement is punitive designed to deter. And third, SEC disgorgement is not necessarily intended to compensate a victim for losses, but instead, the funds that the SEC collects frequently go to the U.S. Treasury.  So that was the basis on which the Kokesh Court found that disgorgement is a penalty. And Liu argued that if it’s a penalty there, it’s a penalty here.


      Regarding the second prong of the syllogism, Liu relied on extensive authority that equity doesn’t aid in the enforcement of penalties, but rather its goal is to provide compensation or to restore the status quo. Even apart from the Kokesh decision, Liu argued that the phrase “equitable relief” can’t encompass disgorgement and spent a lot of time tracing the history of equity courts awarding accounting, or disgorgement, saying that essentially whenever a court would do that, it would only do that in certain narrow contexts – for example, when there was a fiduciary relationship between the party that had been wronged and the party that had been ordered to disgorge. And so it said “equitable relief” hasn’t been understood historically to encompass quite the modern-day SEC disgorgement.


      And Liu also argued, strongly, that removing the SEC’s ability to obtain disgorgement in court would not have much of an impact on the SEC’s ability to regulate financial misconduct. He pointed out that the SEC can still obtain disgorgement in its administrative proceedings under an express grant of authorization, and that in judicial proceedings, even if it loses the ability to obtain disgorgement, can still obtain civil penalties equal to the gross amount of a defendant’s pecuniary gain for certain categories of violations.


      So those are the arguments of the parties. And as I mentioned, at oral argument yesterday, there was really very little jousting over the SEC’s core claim that Congress’ use of the phrase, quote, “any equitable relief” in 2002 created a disgorgement remedy in federal court. A lot of energy in the briefing on that issue but actually very few questions from the justices attacking that premise. In fact, to the contrary a number of justices asked counsel on both sides how the Court should fashion the disgorgement remedy under the assumption that it rejected Liu’s argument that the remedy doesn’t exist.


      Interestingly enough, one of those justices was Justice Gorsuch. As I mentioned before, he observed during the Kokesh argument that, quote, “We’re just making it up when it comes to the judicial disgorgement remedy.” But three years later, having had the benefit of briefing on this subject, Justice Gorsuch asked several questions that indicated his interest in how to fashion a workable and principled disgorgement remedy. In particular, he asked several questions of both sides to test a possible rule that the SEC should, when it gets money in disgorgement actions, the rule should be that it should really seek to return it to investors where that’s possible. But Justice Gorsuch never explicitly questioned the SEC’s core claim that the disgorgement remedy does actually exist in the first place.


      Justice Alito took a similar approach to Justice Gorsuch. He asked wouldn’t disgorgement qualify the traditional form of equitable relief if it were limited to the net profits obtained by the wrongdoer and if every effort were made to return the money to the victims.


      And Justice Kavanaugh, in multiple questions of both parties, also indicated an interest in the answer to this question, and even referred to, quote, “Justice Alito’s two conditions: the net profits condition and the returning money to investors condition.”


      And meanwhile, Justices Sotomayor, Ginsburg, and Kagan all asked questions indicating some degree of sympathy with the SEC’s core position that Congress has authorized disgorgement in federal court.


      In short, I think the questioning during oral argument was actually fairly lopsided in the sense of being more skeptical of Liu’s arguments than the Commission’s arguments and really, with a number of questions, taking the premise that there is a disgorgement remedy and, assuming that is the case, what do we do with that?


      The government’s lawyer had long stretches where he spoke without interruption from the justices. And he even ended his argument with time to spare because the justices had no further questions for him.


      So there’s always the usual caveats about predicting the outcomes of cases from oral arguments. Those caveats invoked, as usual, I do think it is safe to say that the Liu case will mark the end of the Commission’s run of unanimous loses at the Court concerning its remedial powers. It seems like there will be at least a few votes for its position. And I would go further and say it wouldn’t surprise me at all if the Commission pulled out a win in this case. It does seem likely that there will be some language, if not an expressed holding, saying that the Court will expect district courts, or instruct district courts, to order the SEC to make best efforts, or reasonable efforts, to compensate victims, to allow defendants to deduct reasonable expenses. But it wouldn’t surprise me at all if they do uphold the Commission’s position on this and allow them to continue seeking disgorgement in federal court.


      So with that background on the case and oral argument, I'm of course happy to take any questions.


Micah Wallen:  Todd, while we’re waiting for a question to come in, I had one question I wanted to ask you. If the Court does say here that the SEC is lacking the authority to seek disgorgement, what is the actual practicable effect on their enforcement regime moving forward?


Todd F. Braunstein:  It’s a good question. I think that the SEC of course will retain its ability to seek disgorgement in administrative proceedings. So that won’t change at all. Their ability to get some of the outside judgments we’ve seen, at least in court, will be somewhat limited. They will of course be able to get penalties up to the gross pecuniary gain the defendants got. But they won’t be able to get as much as they had previously. And so there may actually be an incentive on the SEC’s part to shift more cases from court to administrative agencies. And we’ve seen that trend very, very emphatically in recent years where the SEC is bringing more and more cases administratively. And to the extent that their ability to obtain disgorgement in federal court is limited or struck down, that trend will only accelerate further.


      In fact, and this was a point that the government lawyer made during oral argument yesterday, if we disallow the disgorgement remedy in federal court, that will give the SEC an incentive to bring more cases administratively where the procedural protections for defendants are not quite the same and that may not be necessarily what the Court wants to do. So it’ll have some effect, but the SEC still will have a very large range of tools at its disposal in pursuing its enforcement regime.


Micah Wallen:  All right. Thank you. We have a question in the queue so we’ll move to that caller.


Caller 1:  Hi, yeah, just a quick question. You mentioned the SEC’s argument and basically analogizing disgorgement to equitable relief for accounting. And I’m curious if you could just elaborate a little bit on that because I’m not really directly seeing the relationship here because an action per equitable accounting would require some sort of fiduciary relationship, and the actual covering of profits would be based, more or less, on the breach of that relationship. Whereas, disgorgement is more of just I’m being forced to hand over something because of an illegal demand by an authority. So if you could just elaborate a little bit on that, their argument, I’d appreciate that.


Todd F. Braunstein:  Yeah, I think the point you raise was one that was emphasized quite strongly by counsel for Liu, that historically that’s exactly what the accounting remedy was. That it involved fiduciaries and to take it and to transplant that to all those under the SEC’s jurisdiction is an error. And I think, essentially, the courts in the ‘60s and ‘70s treated disgorgement as really part of its ancillary jurisdiction in equity. They were allowed to issue injunctions, and they said, “Well, we can issue injunctions. Injunction is a form of equitable relief. And ancillary to that, we will also grant disgorgement.”


      So that was the theory. It’s not a theory that the SEC is defending today or advancing today, but they are saying that it forms the background. And when Congress used the phrase “equitable relief,” that’s what they were referring to. And they talk about some legislative history, including some committee reports, which is not going to necessarily influence this particular Court. But what I think that what they are trying to do is they're trying to say the phrase “equitable relief” doesn’t necessarily mean what it meant in 1800 or 1850, but it has to be understood as is was understood in 2002 in terms of the kinds of relief that courts were granting. That is how they presented the argument.


      Interestingly, that claim that “equitable relief” doesn’t mean what it necessarily meant in 1800 or 1850, at one point when counsel for Liu made the argument, “Well, historically, disgorgement required a fiduciaries relationship, and so there really isn’t much of an analogy there,” Justice Alito asked a somewhat skeptical question saying, “Is it right for us to presume that when they use this phrase ‘equitable relief’ in 2002, they meant to incorporate every curlicue of traditional equitable jurisprudence?” It was an interesting turn of phrase, the word curlicue.


      And so I think that position at least found some sympathy with the justices; whether it’s dispositive, who knows.


Micah Wallen:  Todd, did you have any closing remarks for us today?


Todd F. Braunstein:  No, I don't think so. It was a very interesting argument. Certainly, a lot different from what I was expecting given the recent history and given what happened in Kokesh. And it’ll be very interesting to see how it plays out in the opinion.


Micah Wallen:  All right. And on behalf of The Federalist Society, I’d like 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. We are adjourned.


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