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Perrie M. Weiner, Edward D. Totino, and Aaron T. Goodman of Baker McKenzie Perrie M. Weiner, Edward D. Totino, and Aaron T. Goodman of Baker McKenzie

Disgorgement has long been one of the Security and Exchange Commission’s most powerful enforcement tools. The courts’ authority to order disgorgement in SEC enforcement actions has been the law of the land for more than 40 years, and the SEC’s primary tool to deter violation of securities laws. Yet, what has been considered settled law supporting the SEC’s authority to seek disgorgement, may soon be overturned. The US Supreme Court has agreed to hear Liu v. Security and Exchange Commission, which directly challenges the SEC’s authority to seek disgorgement. This challenge was invited by the court’s recent decision in Kokesh v. Security and Exchange Commission, wherein the court determined that disgorgement, as sought by the SEC, is a penalty not an equitable remedy. This dramatic shift by the court left cracks in what has been a foundational aspect of the SEC’s regulatory authority. Indeed, it is anticipated that the court, having already reclassified disgorgement as a penalty, may well overturn the authority previously used to support the SEC’s use of the remedy as its primary enforcement mechanism. The outcome has the potential to change the regulatory landscape for many years, not to mention the immediate impact such a change would have on the currently pending investigations and enforcement actions.

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