Disgorgement

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Disgorgement is an equitable remedy which is available in a wide variety of cases, and simply means repaying the profits made by unlawful means. In the context of the securities laws, it is a powerful remedy used by the SEC to obtain relief from defendants in its enforcement cases.

Generally, disgorgement is a form of “[r]estitution measured by the defendant’s wrongful gain.” Restatement (Third) of Restitution and Unjust Enrichment § 51, Comment a, p. 204 (2010) (Restatement (Third)). Disgorgement requires that the defendant give up “those gains … properly attributable to the defendant’s interference with the claimant’s legally protected rights.” Beginning in the 1970’s, courts ordered disgorgement in SEC enforcement proceedings in order to “deprive … defendants of their profits in order to remove any monetary reward for violating” securities laws and to “protect the investing public by providing an effective deterrent to future violations.” Texas Gulf, 312 F.Supp., at 92.

The law regarding disgorgement in SEC cases has undergone significant changes in recent years, starting with Kokesh vs. SEC, 137 S.Ct. 1635 (2017) where the Supreme Court held that disgorgement actions must be commenced within five years of the date the claim accrues.

Then in Liu vs. SEC, 754 Fed. Appx. 505 (2020) the Supreme Court further limited the remedy by holding that the SEC has statutory authority to seek disgorgement so long as the amount of disgorgement does not exceed the defendant’s net profits and is awarded for victims.

However, in 2021, Congress passed the 60th annual National Defense Authorization Act (NDAA). Encompassed within the $740.5 billion military spending bill is an amendment (the Amendment) to the Securities Exchange Act of 1934 (Exchange Act), which (1) codifies the SEC’s authority to seek disgorgement in federal district court; (2) tolls the statute of limitations while defendants are outside of the United States; and (3) doubles the statute of limitations for scienter-based claims from five years to 10 years. For all other claims, the five-year statute of limitations remains.

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