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John Berry and Elaine Goldenberg are partners at Munger Tolles & Olson, LLP (Photo: Courtesy Photo) John Berry and Elaine Goldenberg are partners at Munger, Tolles & Olson, LLP (Photo: Courtesy Photo)

On March 3, the Supreme Court will hear argument in Liu v. SEC, a case presenting yet another challenge to the Securities and Exchange Commission’s enforcement powers. The petitioners in that case are facing a $35 million judgment for disgorgement and penalties, obtained by the SEC for their role in an offering fraud. They are challenging whether the SEC has the power to seek the disgorgement remedy, which—after years of unfettered use—has come under heightened scrutiny by the Supreme Court. Much has been written about this case, but we hope to provide a unique perspective because one of us litigated the Liu case as an SEC trial attorney and the other argued for the government in a Supreme Court case, Kokesh v. SEC, that is at the heart of the Liu appeal.

Today, the SEC has (at least for the time being) two basic monetary sanctions in its arsenal: civil penalties and disgorgement. Congress empowered the agency in the mid-1980s to seek civil penalties in insider-trading cases, and in 1990 broadened that power to encompass all SEC cases. The disgorgement remedy has only a slightly longer history. It traces back to the Second Circuit’s 1971 ruling in SEC v. Texas Gulf Sulphur Co., when the Second Circuit held that the SEC’s statutory authority to obtain injunctions also implied the power to ask a court to award disgorgement—that is, to force a defendant to return the “profits from his violation.”

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