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Liu v. S.E.C.: Supreme Court’s narrowing of SEC disgorgement raises questions for insider trading cases

Alan R. Friedman (Kramer Levin Naftalis & Frankel LLP, New York, New York, USA)
Dani R. James (Kramer Levin Naftalis & Frankel LLP, New York, New York, USA)
Gary P. Naftalis (Kramer Levin Naftalis & Frankel LLP, New York, New York, USA)
Paul H. Schoeman (Kramer Levin Naftalis & Frankel LLP, New York, New York, USA)
Chase Henry Mechanick (Kramer Levin Naftalis & Frankel LLP, New York, New York, USA)

Journal of Investment Compliance

ISSN: 1528-5812

Article publication date: 25 November 2020

Issue publication date: 13 December 2020

Abstract

Purpose

To analyze the U.S, Supreme Court’s decision in Liu v. S.E.C., 140 S. Ct. 1936 (2020) and its potential implications for insider trading cases.

Design/Methodology/Approach

Provides context on the history of disgorgement in SEC enforcement proceedings; discusses factual and procedural background underlying the Liu decision; summarizes the Court’s opinion and rationale, with a particular focus on the Court’s pronouncements regarding the permissible scope of SEC disgorgement as an equitable remedy; identifies and explores three possible issues in insider trading cases that may be affected by the Court’s narrowing of SEC disgorgement.

Findings

In Liu, the Supreme Court narrowed SEC disgorgement by stating that, as a general matter, SEC disgorgement is not permitted where: (1) the proceeds are not remitted to investors; (2) one defendant is made to disgorge profits that were received by someone else; or (3) the amount of disgorgement fails to deduct legitimate business expenses, in each case subject to possible exemptions as outlined by the Court.

Practical implications

This rule may call into question whether courts may: (a) order disgorgement against insider traders, given the difficulty of identifying investors who have been harmed; (b) order insider traders to disgorge profits earned by others on account of their violations; or (c) order insider traders to pay civil penalties under Section 21 A of the Exchange Act based on profits earned by others.

Originality/Value

Expert analysis and guidance from experienced securities enforcement lawyers with expertise in insider trading.

Keywords

Citation

Friedman, A.R., James, D.R., Naftalis, G.P., Schoeman, P.H. and Mechanick, C.H. (2020), "Liu v. S.E.C.: Supreme Court’s narrowing of SEC disgorgement raises questions for insider trading cases", Journal of Investment Compliance, Vol. 21 No. 1, pp. 63-68. https://doi.org/10.1108/JOIC-08-2020-0019

Publisher

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Emerald Publishing Limited

Copyright © 2020, Kramer Levin Naftalis and Frankel LLP.