Cornell Law Review

Since its inception in 1934, the Securities and Exchange Commission (the Commission or the SEC) has wielded statutory authority to seek injunctive relief for violations of the federal securities law.^{11. See infra notes 28–36 and accompanying text.} Since 1970 courts have, at the Commission’s behest and without much analysis, ordered violators to disgorge profits—make that lots and lots of profits—gained in the course of their wrongdoing.^{22. See infra note 41 and accompanying text and subparts I.C–D. Disgorgement also is sometimes obtained as a matter of settlement. For instance, in September 2018, the Commission obtained a $933 million disgorgement settlement from Petr´oleo Brasileiro SA, augmenting that company’s agreement to pay a $853 million penalty. Pete Schroeder, U.S. SEC Collects Nearly $4 Billion in Fines, Disgorgement in Fiscal 2018, REUTERS BUS. NEWS (Nov. 2, 2018), https:// www.reuters.com/article/us-usa-sec/u-s-sec-collects-nearly-4-billion-in-finesdisgorgement-in-fiscal-2018-idUSKCN1N71K4 [https://perma.cc/P9J5-Q84G].} In some instances, the profits are returned to victims.^{33. See infra note 57 and accompanying text.} In others, either because the victims are too many and too scattered or because the violation is a victimless one such as engaging in bribery, the ill-gotten gains are kept by the government.^{44. See infra notes 78–81 and accompanying text.} In either case, the existence of the disgorgement remedy has been regarded by the lower federal courts as well settled enough so as to result in SEC disgorgement recoveries of over $2.9 billion in 2017 alone.^{55. SEC, DIV. OF ENF’T, ANNUAL REPORT 7 (2017), https://www.sec.gov/files/ enforcement-annual-report-2017.pdf [https://perma.cc/HBK9-CVMG] [hereinafter ANNUAL REPORT].}

During the period that the Commission has successfully pursued disgorgement actions, Congress has extended its enforcement authority several times.^{66. See infra Section II.A.} The SEC now is specifically empowered to (among other things) seek to bar certain violators from serving in the financial industry, seek all possible equitable remedies, and, subject to stated caps, seek civil monetary penalties for violations of the laws it is charged with enforcing.^{77. 15 U.S.C. § 78u(d) (2018).} Notably, it is typical for each legislative expansion of SEC authority to reiterate that there is no intent to limit the Commission’s power to pursue other remedies, ritually reciting something like “[t]he actions authorized by this paragraph may be brought in addition to any other action that the Commission . . . is entitled to bring.”^{88. See, e.g., 15 U.S.C. § 78u (2018) (relating to civil penalties for insider trading).} Moreover, both legislative history and statutory wording have acknowledged the SEC’s use of the disgorgement remedy and have specified how disgorged amounts are to be factored into other calculations, such as certain recoveries by private plaintiffs. ^{99. See infra notes 119–120 and accompanying text.} There even is a statutory scheme dealing with the distribution of disgorged amounts to wronged investors.^{1010. See infra notes 138–139 and accompanying text.}.

Missing from the legislative tablet, however, is any explicit creation of the disgorgement remedy itself, much less any attempt to define its nature and parameters. It has fallen to the federal courts (and academics) to struggle with niceties like whether the amount to be paid pursuant to a disgorgement order can be discharged in bankruptcy,^{1111. See infra note 92 and accompanying text.} whether a disgorgement order constitutes “jeopardy” for purposes of the Fifth Amendment,^{1212. See infra note 89 and accompanying text.} whether actions for disgorgement give rise to the right of trial by jury,^{1313. See infra note 90 and accompanying text.} and whether there is an applicable statute of limitations.^{1414. See infra note 95 and accompanying text.}. The last of these questions eventually resulted in a split among the circuits and was resolved (in the affirmative) by the Supreme Court in Kokesh v. SEC.^{1515. 137 S. Ct. 1635, 1639, 1641 (2017).}

Although Congress has specified a statute of limitations for most of the remedies available to private plaintiffs under the federal securities laws,^{1616. See, e.g., 15 U.S.C. § 77m (2018) (specifying statute of limitations for express private rights under that Act).} it has tended to rely on catch-all provisions found elsewhere in the United States Code to provide limits for government enforcement actions.^{1717. See, e.g., Kokesh, 137 S. Ct. at 1639 (relying on 28 U.S.C. § 2462 for the statute of limitations in a disgorgement action).} Thus, 28 U.S.C. § 2462, which traces lineage from the eighteenth century, generally requires that “enforcement of any civil fine, penalty, or forfeiture” be “commenced within five years from the date when the claim first accrued.”^{1818. 28 U.S.C. § 2462 (2018).} The federal courts easily concluded that this statute restrains the SEC’s express statutory authority to seek civil monetary penalties; in 2013, the Supreme Court confirmed its applicability regardless of the time the claim was discovered.^{1919. Gabelli v. SEC, 133 S. Ct. 1216, 1220 (2013).}

Left open until 2017, however, was the question of whether disgorgement was a “fine, penalty, or forfeiture.”^{2020. 28 U.S.C. § 2462.}. The Kokesh case, noted above, held that it was a penalty and thus subject to § 2462.^{2121. Kokesh, 137 S. Ct. at 1639.} Moreover, the case had one of those footnotes, suggesting that the threshold matter of whether courts should be ordering disgorgement in SEC enforcement actions at all might be up for grabs.^{2222. Id. at 1642 n.3.} Specifically, footnote 3 reads as follows: 

Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context. The sole question presented in this case is whether disgorgement, as applied in SEC enforcement actions, is subject to § 2462’s limitations period.^{2323. Id.}

The lower federal courts already are grappling with the fallout as defendants in actions for disgorgement brought by the SEC and other agencies are making invocation of that issue de rigueur.^{2424. See, e.g., SEC v. Sample, No. 3:14-CV-1218-B, 2017 WL 5569873, at *2 (N.D. Tex. Nov. 20, 2017) (rejecting that Kokesh affected how courts apply disgorgement principles); FTC v. J. William Enters., LLC, No. 6:16–cv–2123–Orl–31DCI, 2017 WL 4776669, at *2 (M.D. Fla. Oct. 23, 2017) (refusing to disregard decades of precedent because of Kokesh’s ominous footnote); CFTC v. Reisinger, No. 11-CV-08567, 2017 WL 4164197, at *3–4 (N.D. Ill. Sept. 19, 2017) (holding that footnote three of Kokesh did not decide anything); SEC v. Jammin Java Corp., No. 2:15–cv–08921 SVW (MRWx), 2017 WL 4286180, at *3–4 (C.D. Cal. Sept. 14, 2017) (holding that Kokesh took no position on the validity of disgorgement remedies).}

This Article first provides background on the judicial development of the SEC disgorgement remedy, up to and through Kokesh. It then examines parallel legislative developments, touching on the fraught subject of legislative history. After describing this necessary context, the Article relies on it to illuminate a problem endemic to litigation about federal remedies. This has to do with the promiscuous use of the word “equitable,” which appears to have greatly complicated any attempt to make sense of disgorgement. The confusion resulting from a sea of unexamined assumptions about “equity” that floats throughout the relevant cases and commentary has obscured a central issue. This is the difference between whether a remedy exists—the primary subject of this Article—and whether, if it does, there are constitutional consequences.^{2525. A companion article examines a second problem, equally endemic to securities enforcement litigation and exacerbated by Kokesh. This has to do with the definition of “punishment,” “penal,” and other variants in light of the extremely unfortunate tendency of courts to assume that context is irrelevant and that the precedents are mix-and-match. See Theresa A. Gabaldon, Why Fences Aren’t Punishment—and Why the Opinion in SEC v. Kokesh is a Crime (hereinafter Gabaldon, Fences) (manuscript on file with the author).}. In the process of shedding light on this subject, this Article answers three specific questions. The first is whether a right to seek disgorgement could be said to exist as a function of the Commission’s express authority to seek equitable remedies. The second is whether the SEC’s right to seek disgorgement could be said to exist at law. The third, which assumes an affirmative answer to both of the first two, is which of the two characterizations is more appropriate. 

The Article’s conclusions as to these specific questions are as follows. First, SEC disgorgement clearly should be recognized as an equitable remedy in instances involving insider trading or similar fiduciary breach. Second, even where SEC disgorgement is not an equitable remedy, Congress has manifested sufficient recognition of the practice to render it authorized at law: it is essentially an “Invisible Man” that can clearly be discerned against its statutory surroundings.^{2626. The “Invisible Man” referred to is the protagonist in the 1897 eponymous science fiction novel by H.G. Wells, not the 1952 work by Ralph Ellison. See generally H.G. WELLS, THE INVISIBLE MAN (1897) (depicting the titular character).}. Third, the characterization as legal or equitable is really only important in determining whether the defendant has a right to jury trial. This is a question that will not be practically important if the Commission seeks some additional remedy that clearly carries the right, but in any event should be determined by Seventh Amendment precedents applied on a case-by-case basis.^{2727. Thus, as subpart III.C will make clear, where there is not some other rightto-jury-triggering remedy sought, the SEC presumably would prefer characterization of the remedy as equitable and the defendant would prefer characterization as legal. What may be more important, however, is whether disgorgement is regarded as punitive. That gives defendants an advantage as far as the statute of limitation is concerned but would have disadvantages for such matters as deductibility and indemnification, by insurance or otherwise. These matters are addressed in subpart III.C.}

To read more, click here: Equity, Punishment, and the Company You Keep: Discerning A Disgorgement Remedy Under the Federal Securities Laws.