Petition for Writ of Certiorari — Team Resources Incorporated, et al., Petitioners v. Securities and Exchange Commission
Supreme Court briefFeb 3, 2020
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No. ______
In the
Supreme Court of the United States
__________________
TEAM RESOURCES INCORPORATED, FOSSIL ENERGY
CORPORATION, AND KEVIN A. BOYLES,
Petitioners,
v.
SECURITIES AND EXCHANGE COMMISSION,
Respondent.
__________________
On Petition for Writ of Certiorari to the
United States Court of Appeals
for the Fifth Circuit
__________________
PETITION FOR WRIT OF CERTIORARI
__________________
JACOB S. FRENKEL
SCOTT A. MACGRIFF
DICKINSON WRIGHT PLLC
1825 I Street N.W.
Suite 900
Washington, D.C. 20006
(202) 466-5953
PHILLIP J. DEROSIER
Counsel of Record
DICKINSON WRIGHT PLLC
500 Woodward Ave.
Suite 4000
Detroit, MI 48226-3425
(313) 223-3500
PDeRosier@dickinson-wright.com
LAUREN A. KWAPIS
DICKINSON WRIGHT PLLC
2600 W. Big Beaver Rd.
Suite 300
Troy, MI 48084
(248) 433-7527
Counsel for Petitioners
Becker Gallagher · Cincinnati, OH · Washington, D.C. · 800.890.5001
i
QUESTION PRESENTED
Whether the Securities and Exchange Commission
may obtain disgorgement from a federal court as an
equitable remedy for securities violations despite this
Court’s determination that disgorgement is a penalty.
ii
PARTIES TO THE PROCEEDING AND
CORPORATE DISCLOSURE
Petitioners Team Resources Incorporated, Fossil
Energy Corporation and Kevin A. Boyles were
defendants in the district court proceedings and
appellants in the court of appeals proceedings.
Pursuant to Rule 29.6, Petitioners state that there
is no parent corporation or publicly held company
owning ten percent (10%) or more of the stock in Team
Resources Incorporated or Fossil Energy Corporation.
Respondent Securities and Exchange Commission
was the plaintiff in the district court proceedings and
the appellee in the court of appeals proceedings.
iii
STATEMENT OF RELATED PROCEEDINGS
• SEC v. Team Resources Inc., et al., No. 18-10931
(5th Cir.) (opinion issued and judgment entered
Nov. 5, 2019; mandate issued Dec. 30, 2019).
• SEC v. Team Resources Inc., et al., No. 3:15-cv01045-N (N.D. Tex.) (order issued June 4, 2018;
final judgment entered June 4, 2018).
There are no additional proceedings in any court
that are directly related to this case.
iv
TABLE OF CONTENTS
QUESTION PRESENTED . . . . . . . . . . . . . . . . . . . . i
PARTIES TO THE PROCEEDING
AND CORPORATE DISCLOSURE . . . . . . . . . . . ii
STATEMENT OF RELATED PROCEEDINGS . . . iii
TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . vi
PETITION FOR WRIT OF CERTIORARI . . . . . . . . 1
OPINIONS BELOW. . . . . . . . . . . . . . . . . . . . . . . . . . 1
JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
STATUTES AND CONSTITUTIONAL
PROVISIONS INVOLVED. . . . . . . . . . . . . . . . . . 1
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . . 3
A. Factual Background and District Court
Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
B. Court of Appeals Proceedings . . . . . . . . . . . . . 7
REASONS FOR GRANTING THE PETITION . . . . 9
I. CONGRESS HAS NOT AUTHORIZED SEC
DISGORGEMENT . . . . . . . . . . . . . . . . . . . . . . . 10
A. Disgorgement Is Not An “Injunction”. . . . . . 13
B. Disgorgement Is Not “Equitable Relief” For
“The Benefit Of Investors” . . . . . . . . . . . . . . 15
1. Disgorgement is Not “Equitable” . . . . . . 16
v
2. Disgorgement is Not “For the Benefit of
Investors” . . . . . . . . . . . . . . . . . . . . . . . . . 20
II. THE COURTS HAVE FAILED TO APPLY
KOKESH CONSISTENTLY. . . . . . . . . . . . . . . . 23
A. The Circuit Courts Continue to Treat
Disgorgement as an Equitable Remedy . . . . 24
B. The SEC and Numerous Other Agencies
Collect Bi l li ons in Unauthorized
Disgorgement Penalties . . . . . . . . . . . . . . . . 30
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
APPENDIX
Appendix A Opinion in the United States Court of
Appeals for the Fifth Circuit
(November 5, 2019). . . . . . . . . . . . App. 1
Appendix B Order and Final Judgment in the
United States District Court,
Northern District of Texas, Dallas
Division
(June 4, 2018) . . . . . . . . . . . . . . . App. 15
Appendix C 15 U.S.C. § 77t . . . . . . . . . . . . . . App. 25
15 U.S.C. § 77v . . . . . . . . . . . . . . App. 31
15 U.S.C. § 78u . . . . . . . . . . . . . . App. 34
15 U.S.C. § 78aa . . . . . . . . . . . . . App. 53
vi
TABLE OF AUTHORITIES
CASES
California v. Sierra Club,
451 U.S. 287 (1981). . . . . . . . . . . . . . . . . . . . 29, 30
Cent. Bank of Denver, N.A. v. First Interstate Bank
of Denver, N.A.,
511 U.S. 164 (1994). . . . . . . . . . . . . . . . . . . . 28, 29
Curtis v. Loether,
415 U.S. 189 (1974). . . . . . . . . . . . . . . . . 13, 16, 17
FTC v. AMG Capital Mgmt., LLC,
910 F.3d 417 (9th Cir. 2018). . . . . . . . . . 26, 27, 31
FTC v. Credit Bureau Ctr., LLC,
937 F.3d 764 (7th Cir. 2019). . . . . . . . . . . . . . . . 29
Great-West Life & Annuity Ins. Co v. Knudson,
534 U.S. 204 (2002). . . . . . . . . . . . . . 16, 21, 22, 30
Grupo Mexicano de Desarrollo S.A. v. All. Bond
Fund, Inc.,
527 U.S. 308 (1999). . . . . . . . . . . . . . . . . . . . 15, 16
Kokesh v. SEC,
137 S. Ct. 1635 (2017). . . . . . . . . . . . . . . . . passim
Mass. Mut. Life Ins. Co. v. Russell,
473 U.S. 134 (1985). . . . . . . . . . . . . . . . . . . . . . . 12
Meghrig v. KFC Western, Inc.,
516 U.S. 479 (1996). . . . . . . . . . . . . . . . . . . . 13, 14
Mertens v. Hewitt Assocs.,
508 U.S. 248 (1993). . . . . . . . . . . . . . 13, 15, 16, 17
vii
Mills v. Elec. Auto-Lite Co.,
396 U.S. 375 (1970). . . . . . . . . . . . . . . . . . . . . . . 29
Mitchell v. Robert DeMario Jewelry, Inc.,
361 U.S. 288 (1960). . . . . . . . . . . . . . . . . . . . . . . 29
Montanile v. Bd. of Trustees of Nat. Elevator Indus.
Health Benefit Plan,
136 S. Ct. 651 (2016). . . . . . . . . . . . . . . . 15, 21, 22
Northwest Airlines, Inc. v. Transport Workers,
451 U.S. 77 (1981). . . . . . . . . . . . . . . . . . . . . . . . 12
Osborn v. Griffin,
865 F.3d 417 (6th Cir. 2017). . . . . . . . . . . . . . . . 26
Porter v. Warner Holding Co.,
328 U.S. 395 (1946). . . . . . . . . . . 13, 14, 17, 21, 29
Saad v. SEC,
873 F.3d 297 (D.C. Cir. 2017). . . . . . . 2, 25, 28, 31
Sandoz Inc. v. Amgen Inc.,
137 S. Ct. 1664 (2017). . . . . . . . . . . . . . . 12, 29, 30
SEC v. Ahmed,
343 F. Supp. 3d 16 (D. Conn. 2018) . . . . . . . . . . 27
SEC v. Banner Fund Int’l,
211 F.3d 602 (D.C. Cir. 2000). . . . . . . . . . . . 22, 23
SEC v. Brooks,
2017 WL 3315137 (S.D. Fla. Aug. 3, 2017) . . . . 27
SEC v. Cavanagh,
445 F.3d 105 (2d Cir. 2006) . . . . . . . . . . . . . 18, 24
viii
SEC v. Contorinis,
743 F.3d 296 (2d Cir. 2014) . . . . . . . 19, 20, 22, 31
SEC v. de Maison,
785 F. App’x 3 (2d Cir. 2019) . . . . . . . . . . . . . . . 27
SEC v. First City Fin. Corp.,
890 F.2d 1215 (D.C. Cir. 1989). . . . . . . . . . . . . . 24
SEC v. Fischbach Corp.,
133 F.3d 170 (2d Cir. 1997) . . . . . . . . . . . . . 18, 21
SEC v. Gentile,
939 F.3d 549 (3d Cir. 2019) . . . . . 3, 24, 25, 27, 31
SEC v. Hall,
759 F. App’x 877 (11th Cir. 2019) . . . . . . . . . . . 27
SEC v. Huffman,
996 F.2d 800 (5th Cir. 1993). . . . . . . . . . . . . 21, 24
SEC v. JT Wallenbrock & Assocs.,
440 F.3d 1109 (9th Cir. 2006). . . . . . . . . . . . 19, 24
SEC v. Liu,
754 F. App’x 505 (9th Cir. 2018), cert. granted
sub nom. Liu v. SEC, — U.S. —, — 2019 WL
5659111 (U.S. Nov. 1 2019) . . . . . . . . . . . . passim
SEC v. MacDonald,
699 F.2d 47 (1st Cir. 1983) . . . . . . . . . . . . . . . . . 24
SEC v. Rind,
991 F.2d 1486 (9th Cir. 1993). . . . . . . . . . . . . . . 18
SEC v. Seghers,
298 F. App’x 319 (5th Cir. 2008) . . . . . . . . . . . . 22
ix
SEC v. Teo,
746 F.3d 90 (3d Cir. 2014) . . . . . . . . . . . . . . 17, 24
SEC v. Texas Gulf Sulphur Co.,
312 F. Supp.77, 92 (S.D. N.Y. 1970) aff’d in
part and rev’d in part, 446 F.2d 1201 (2d Cir.
1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim
SEC v. Warde,
151 F.3d 42 (2d Cir. 1998) . . . . . . . . . . . . . . . . . 19
Teamsters v. Terry,
494 U.S. 558 (1990). . . . . . . . . . . . . . . . . . . . . . . 13
Tull v. United States,
481 U.S. 412 (1987). . . . . . . . . . . . . . . . . . . . 16, 21
STATUTES AND REGULATIONS
15 U.S.C. § 77a et seq. . . . . . . . . . . . . . . . . . . . . . . . . 1
15 U.S.C. § 77h-1(e) . . . . . . . . . . . . . . . . . . . . . . 11, 28
15 U.S.C. § 77t(b) . . . . . . . . . . . . . . . . . . . . . . . . 10, 13
15 U.S.C. § 77t(d) . . . . . . . . . . . . . . . . . . . . . . . . . 4, 10
15 U.S.C. § 77t(d)(1). . . . . . . . . . . . . . . . . . . . . . . . . 10
15 U.S.C. § 78a et seq. . . . . . . . . . . . . . . . . . . . . . . . . 1
15 U.S.C. § 78u(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
15 U.S.C. § 78u(d)(1) . . . . . . . . . . . . . . . . . . . . . 10, 13
15 U.S.C. § 78u(d)(3) . . . . . . . . . . . . . . . . . . . . . . . . 10
15 U.S.C. § 78u(d)(3)(B) . . . . . . . . . . . . . . . . 15, 28, 31
15 U.S.C. § 78u(d)(5) . . . . . . . . . . . . . . . 10, 15, 16, 20
x
15 U.S.C. § 78u-1(a)(2) . . . . . . . . . . . . . . . . . . . . . . . 10
15 U.S.C. § 78u-2(e) . . . . . . . . . . . . . . . . . . . . . . 11, 28
28 U.S.C. § 1254(1). . . . . . . . . . . . . . . . . . . . . . . . . . . 1
28 U.S.C. § 2462 . . . . . . . . . . . . . . . . . . . . . 5, 7, 25, 31
Investor Protection and Capital Markets Fairness
Act, H.R. 4344, 116th Cong. § 2 (2019), available
at https://congress.gov/bill/116th-congress/housebill/4344/text . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Securities Enforcement Remedies and Penny Stock
Reform Act of 1990, Pub.L. 101–429, 104 Stat.
931. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
OTHER AUTHORITIES
Stephen M. Bainbridge, Kokesh Footnote Three
Notwithstanding: The Future of the
Disgorgement Penalty in SEC Cases, 56 Wash.
U. J.L. & Pol’y 17 (2018). . . . . . . . . . 11, 27, 28, 29
Francesco A. DeLuca, Sheathing Restitution’s
Dagger Under the Securities Acts: Why Federal
Courts Are Powerless to Order Disgorgement in
SEC Enforcement Proceedings, 33 Rev. Banking
& Fin. L. 899 (2014) . . . . . . . . . . . . . . . . 11, 18, 30
1 Dan B. Dobbs, Law of Remedies, § 4.3(5) (2d
ed. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Colleen P. Murphy, Misclassifying Monetary
Restitution, 55 SMU L. Rev. 1577 (2002). . . . . . 26
Oral Arg. Tr., Kokesh v. SEC, No. 16-529 (Apr. 18,
2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
xi
Petition for Certiorari, Liu v. SEC, No. 18-1501,
2019 WL 2354737 (filed, May 31, 2019) . . passim
Restatement of Restitution § 215, cmt. a (1936). . . 22
Restatement (Third) of Restitution and Unjust
Enrichment § 51, cmt. h . . . . . . . . . . . . . . . . . . . 19
4 S. Symons, Pomeroy’s Equity Jurisprudence
§ 1234 (5th ed. 1941). . . . . . . . . . . . . . . . . . . . . . 22
11A Charles Alan Wright, Arthur R. Miller, & Mary
Kay Kane, Federal Practice and Procedure
§ 2941 (2d ed. 1995) . . . . . . . . . . . . . . . . . . . . . . 16
1
PETITION FOR WRIT OF CERTIORARI
Petitioners Team Resources Incorporated, Fossil
Energy Corporation and Kevin A. Boyles respectfully
petition for a writ of certiorari to review the judgment
of the United States Court of Appeals for the Fifth
Circuit in this case.
OPINIONS BELOW
The Fifth Circuit’s opinion is reported at 942 F.3d
272 and reproduced at App.1-14. The district court’s
opinion is unreported but appears at 2018 WL 6737675
and reproduced at App.15-22.
JURISDICTION
The Fifth Circuit issued its opinion and entered its
judgment on November 5, 2019. App.1. This Court has
jurisdiction under 28 U.S.C. § 1254(1).
STATUTES AND CONSTITUTIONAL
PROVISIONS INVOLVED
Relevant provisions of the Securities Act of 1933, 15
U.S.C. § 77a et seq., and the Securities Exchange Act of
1934, 15 U.S.C. § 78a et seq., are reproduced at App.2554.
INTRODUCTION
This petition involves the same open and recurring
question already pending before this Court in Liu v.
SEC (No. 18-1501)—whether the Securities and
Exchange Commission (“SEC”) may seek and obtain
disgorgement in federal court for violation of securities
laws, despite this Court’s determination that
2
disgorgement is a penalty. Kokesh v. SEC, 137 S. Ct.
1635, 1643 (2017).
In Petitioners’ case, when the SEC sued for alleged
violations of federal securities laws, Petitioners settled
the civil allegations and agreed to entry of civil
injunctive relief but reserved the right to contest the
amounts of any disgorgement or civil penalties that
may be imposed. Granting the SEC’s request for
remedies, the district court ordered disgorgement in an
amount equal to statutory penalties, doubling
Petitioners’ liability from approximately $15 million to
$30 million.
Nothing in the federal securities laws or other
federal statutes explicitly authorized the SEC to
disgorge profits in federal court civil injunctive
proceedings. But, for nearly 50 years, the SEC has
made a regular practice of seeking disgorgement
unlawfully. Certain courts, including the Fifth Circuit,
continue to order and affirm disgorgement
notwithstanding the lack of statutory authority for a
remedy that, as this Court has held, is a penalty.
Kokesh, 137 S. Ct. at 1645.
Although this Court in Kokesh expressly declined to
consider whether the courts had authority to order SEC
disgorgement as an equitable remedy, see id. at 1642
n.3, its reasoning in Kokesh dictates that they cannot.
Simply, “Kokesh overturned a line of cases . . . that had
concluded that disgorgement was remedial and not
punitive.” Saad v. SEC, 873 F.3d 297, 305 (D.C. Cir.
2017) (Kavanaugh, J., concurring). Lower courts no
longer are free to “rubber-stamp” SEC requests for
disgorgement “simply because [they] ha[ve] historically
3
been permitted to do so.” SEC v. Gentile, 939 F.3d 549,
565 (3d Cir. 2019) (applying Kokesh in the context of an
SEC injunction).
Accordingly, Petitioners respectfully request that
the Court hold this petition pending its decision in Liu,
and dispose of this case in a manner consistent with
Liu.
STATEMENT OF THE CASE
A. Factual Background and District Court
Proceedings
On April 6, 2015, the SEC brought a civil
enforcement action against Petitioners alleging
violations of the federal securities laws. See Compl.
¶¶ 8, 95-106, SEC v. Team Resources Inc., No. 3:15-cv01045-N, ECF # 1 (N.D. Tex. April 6, 2015). As the
district court summarized, the SEC’s complaint alleged
that Petitioners participated in a “fraudulent oil and
gas investing scheme” in which they allegedly “lured
investors by touting unreasonable oil and gas
production figures and investment returns.” App.1516. According to the SEC, Petitioners “then distributed
misleading status updates that led investors to believe
that the oil and gas companies were performing well,
when in fact the companies’ performance was dismal.”
App.16.
The SEC also alleged that Petitioners
“received large sales commissions ranging from 25% to
35% that they did not disclose to investors,” and that
they “failed to register as securities brokers as required
by law.” App.16.
4
The parties immediately reached a settlement, with
Petitioners consenting to entry of separate April 10,
2015 judgments of “permanent injunction,” without
admitting or denying liability.1 See Judgments as to
Team Resources Inc., Fossil Energy Corp., and Kevin
Boyles, SEC v. Team Resources Inc., No. 3:15-cv-01045N, ECF # 11, 13, 14 (N.D. Tex. April 10, 2015).
However, pursuant to the terms of the settlement,
Petitioners negotiated and reserved the right to contest
the amounts of disgorgement and civil penalties they
would be required to pay. See id. at ¶ IV. In addition,
the parties agreed that “[i]n connection with the
Commission’s motion for disgorgement and/or civil
penalties, the parties may take discovery, including
discovery from appropriate non-parties.” Id.
On February 28, 2017, the SEC filed a motion for
remedies and entry of a final judgment, seeking
$30,494,037.26 in disgorgement. See SEC’s Mtn. for
Remedies and Entry of Judgment and Br. at 4, SEC v.
Team Resources Inc., No. 3:15-cv-01045-N, ECF # 42
(N.D. Tex. Feb. 28, 2017). Beyond that, it also sought
civil penalties under 15 U.S.C. §§ 77t(d) and 78u(d),
because, as the SEC believed, “disgorgement . . . does
not result in any actual economic penalty or act as a
financial disincentive to engage in securities fraud.”
Id. at 6 (citation to case law omitted). The SEC argued
for civil penalties “up to the amount” of Petitioners
alleged “gross pecuniary gain,” of more than $30
million. Id. at 7.
1
See Consents as to Team Resources Inc., Fossil Energy Corp., and
Kevin Boyles, SEC v. Team Resources Inc., No. 3:15-cv-01045-N,
ECF # 3, 5, 6 (N.D. Tex. April 6, 2015).
5
Petitioners countered that the five-year limitations
period in 28 U.S.C. § 2462 prohibited the SEC from
seeking to disgorge an amount in excess of $30
million—a figure that failed to account for legitimate
business expenses or distinguish between purportedly
ill-gotten and lawfully obtained funds in any event.
See Defs.’ Resp. in Opp. to SEC’s Mtn. for Remedies
and Entry of Judgment and Br. at 3-13, SEC v. Team
Resources Inc., No. 3:15-cv-01045-N, ECF # 45 (N.D.
Tex. March 16, 2017). Petitioners argued they should
“have an opportunity in discovery . . . to test and
establish the reasonableness” of the SEC’s
disgorgement calculation and the “asserted connection”
between the amount sought and the alleged violations.
Id. at 9.
While the SEC’s motion was pending, this Court
issued its decision in Kokesh v. SEC, 137 S. Ct. 1635
(2017), proving correct Petitioners’ statute of
limitations argument.
Under Kokesh, “SEC
disgorgement constitutes a penalty within the meaning
of § 2462” to which the five-year limitations period
indeed applies. Id. at 1643. This is so because
disgorgement “is imposed as a consequence of violating
public law” for “punitive purposes” and to deter future
violations rather than compensate the victim. Id. at
1643–44. “SEC disgorgement thus bears all the
hallmarks of a penalty.” Id. at 1644. The Court left
open, however, whether the SEC had authority to seek
disgorgement in the first instance: “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
6
properly applied disgorgement principles in this
context.” Id. at 1642 n.3.
Following Kokesh, the SEC filed an amended motion
for remedies on October 5, 2017, this time seeking
$15,508,280.13 in disgorgement. See SEC’s Amend.
Mtn. for Remedies and Entry of Judgment and Br. at 4,
SEC v. Team Resources Inc., No. 3:15-cv-01045-N, ECF
# 61 (N.D. Tex. Oct. 5, 2017). Again, though, in
addition to the disgorgement penalty, the SEC also
sought civil penalties up to the amount of the
disgorgement. Id. at 7-8.
In response to the SEC’s amended motion,
Petitioners argued that the Supreme Court’s
determination in Kokesh that disgorgement is a
“penalty,” i.e., a legal remedy, meant that the district
court lacked statutory authority to order disgorgement
because the securities laws only gave district courts
power to award equitable relief and monetary civil
penalties not including disgorgement. See Defs.’ Resp.
in Opp. to SEC’s Amend. Mtn. for Remedies and Entry
of Judgment and Br. at 1-6, SEC v. Team Resources
Inc., No. 3:15-cv-01045-N, ECF # 64 (N.D. Tex. Oct. 18,
2017). Petitioners further asserted that the SEC’s
disgorgement calculation was flawed because it was
nothing more than a “conclusory approximation” and it
failed to account for direct, investment-related
expenses, such as the costs associated with “oil field
operations (including drilling).” Id. at 7-11. Petitioners
therefore requested “an opportunity in discovery, in
advance of a hearing, to test and establish the
unreasonableness of the approximation and asserted
7
connection of the funds the SEC claims are subject to
disgorgement.” Id. at 10-11.
The district court, however, granted the SEC’s
amended motion without permitting discovery or
holding any hearing. App.15-22.
Regarding Petitioners’ Kokesh argument, the
district court was not persuaded. Citing to footnote
three, the court insisted that Kokesh “merely” held that
disgorgement is subject to the five-year limitations
period in § 2462, and nothing more. App.18. Relying
on an unsubstantiated chart prepared by an SEC
investigator, the district court ordered Petitioners to
pay disgorgement in the amount of $15,508,280.13,
App.18-19, 23, which the SEC claimed to represent “the
proceeds received by each Defendant from the fraud
scheme, net of monies returned to investors.” See
SEC’s Amend. Mtn. for Remedies and Entry of
Judgment and Br. at 5. The court also awarded
$2,998,870.17 in prejudgment interest, as well as civil
penalties “equal to the disgorgement amounts.”
App. 21, 23.
Petitioners appealed.
B. Court of Appeals Proceedings
On appeal before the Fifth Circuit, Petitioners
reiterated that the district court lacked authority to
order disgorgement under Kokesh. Petitioners’ C.A. Br.
at 13-28. “[A]s a penalty subject to the five-year
limitations period of § 2462,” Petitioners argued “SEC
disgorgement is necessarily a civil penalty,” meaning it
is one that could have traditionally been enforced only
in a court of law, not equity. Id. at 18-19. “It follows
8
then that SEC disgorgement . . . must be subject to the
same rules as other civil remedies,” including the
requirement that such remedies be authorized by
statute. Id. at 19. And SEC disgorgement is not. Id.
at 24-28.
Like the district court, however, the Court of
Appeals pointed to footnote three and concluded that
Kokesh “decided only the issue before it.” App.8.
“True,” it conceded, “during the Kokesh oral argument
some members of the Supreme Court questioned the
source of courts’ authority to order disgorgement in
civil enforcement proceedings.”2 App.10 n.4. And the
Fifth Circuit was aware of at least “one” scholar who
argued that SEC disgorgement did not survive Kokesh.
App.10 n.4. What is more, only a few days before the
Fifth Circuit issued its decision, this Court granted
certiorari in Liu, “a Ninth Circuit decision addressing
whether district courts have disgorgement authority
after Kokesh.” App.2 (citing SEC v. Liu, 754 F. App’x
505 (9th Cir. 2018) (unpublished), cert. granted sub
nom. Liu v. SEC, ––– U.S. ––––, ––– 2019 WL 5659111
(U.S. Nov. 1 2019) (No. 18-1501)). Still, none of this
convinced the Court of Appeals to reexamine its
previous case law characterizing disgorgement as a
remedy within the courts’ general equitable powers.
2
“[Q]uestioned” may be an understatement. Five Justices inquired
into the statutory grounds for disgorgement at the Kokesh oral
argument. Oral Arg. Tr. 7-9, 13, 31, 52, Kokesh v. SEC, No. 16-529
(Apr. 18, 2017). Chief Justice Roberts, in particular, remarked
that the SEC “devised this remedy or relied on this remedy
without any support from Congress.” Id. at 31. Justice Gorsuch
noted that with “no statute governing” disgorgement, “[w]e’re just
making it up.” Id. at 52.
9
App.6-10.
The Fifth Circuit therefore affirmed.
App.10, 14.
This petition followed.
REASONS FOR GRANTING THE PETITION
Having granted the Liu Petition,3 this Court has
already acknowledged, however implicitly, that the
conflict between Kokesh and lower court decisions still
applying SEC disgorgement as a viable, extra-statutory
remedy in equity warrants review. This petition
involves and brings before this Court that same
conflict.
SEC disgorgement punishes defendants for
violating public laws with the purpose of deterring
future violations. That punitive mindset and approach
permeates the lower court record.
However,
disgorgement lacks a basis in statute and, under
Kokesh, does not qualify as an equitable remedy.
Accordingly, just like the Ninth Circuit, the Fifth
Circuit upheld the imposition of a penalty against
Petitioners that Congress never authorized. This Court
therefore should hold the petition pending its decision
in Liu, and dispose of this case in a manner consistent
with Liu.
3
Petition for Certiorari, Liu v. SEC, No. 18-1501, 2019 WL
2354737 (filed, May 31, 2019) (hereinafter the “Liu Petition”).
10
I. CONGRESS HAS NOT AUTHORIZED SEC
DISGORGEMENT
As the Liu Petition notes, “Congress has expressly
identified the forms of relief available to the SEC in
civil cases such as this one.” 2019 WL 2354737, at *8.
Disgorgement is not among them. When the SEC
enforces securities law violations in federal court, the
SEC is limited to seeking injunctive relief, 15 U.S.C.
§§ 77t(b), 78u(d)(1), “civil [monetary] penalt[ies],” 15
U.S.C. § 77t(d)(1), and “equitable relief that may be
appropriate or necessary for the benefit of investors,”
15 U.S.C. § 78u(d)(5).
“Initially,” under the Securities Act of 1933 and
Securities and Exchange Act of 1934, “the only remedy
available to the SEC in an enforcement action was an
injunction barring future violations of securities laws.”
Kokesh, 137 S. Ct. at 1640. Congress since has
expanded the SEC’s authority, affording it a
comprehensive “panoply of enforcement tools.” Id. The
SEC may, for example, “promulgate rules and
investigate violations of those rules.” Id. The agency
may pursue enforcement actions against those who buy
or sell securities based on material nonpublic
information and seek a penalty of up to “three times
the profit gained or loss avoided.” 15 U.S.C. § 78u1(a)(2). The SEC may seek civil monetary penalties for
virtually all federal securities law violations. 15 U.S.C.
§§ 77t(d), 78u(d)(3).
And, in the context of
administrative enforcement proceedings, the SEC may
claim disgorgement of a defendant’s ill-gotten gains
11
arising from securities law violations.
§§ 77h-1(e), 78u-2(e).4
15 U.S.C.
Yet “[n]othing in the securities acts authorizes the
SEC to seek legal disgorgement.” Francesco A.
DeLuca, Sheathing Restitution’s Dagger Under the
Securities Acts: Why Federal Courts Are Powerless to
Order Disgorgement in SEC Enforcement Proceedings,
33 Rev. Banking & Fin. L. 899, 907 (2014). Courtordered disgorgement “is a relatively new penalty . . .
created by judicial fiat at the SEC’s behest” when the
agency began urging courts to order surrender of
profits in the exercise of their inherent equity power.
Stephen M. Bainbridge, Kokesh Footnote Three
Notwithstanding: The Future of the Disgorgement
Penalty in SEC Cases, 56 Wash. U. J.L. & Pol’y 17, 19
(2018). “Beginning in the 1970’s, courts ordered
disgorgement . . . to ‘deprive defendants of their profits
in order to remove any monetary award for violating’
securities laws and to ‘protect the investing public by
providing an effective deterrent to future violations.’”
Kokesh, 137 S. Ct. at 1640 (quoting SEC v. Texas Gulf
Sulphur Co., 312 F. Supp.77, 92 (S.D. N.Y. 1970) aff’d
in part and rev’d in part, 446 F.2d 1201 (2d Cir. 1971)
(ellipsis omitted)).
The problem here (and in Kokesh for that matter)
arose because, even after Congress empowered the SEC
to seek civil monetary penalties, “the Commission has
continued its practice of seeking [extra-statutory]
disgorgement in enforcement proceedings.” Id.
4
See Securities Enforcement Remedies and Penny Stock Reform
Act of 1990, Pub.L. 101–429, 104 Stat. 931.
12
The absence of a statutory provision expressly
authorizing disgorgement is “strong evidence that
Congress did not intend” to permit the remedy. Mass.
Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 146 (1985).
In fact, “[t]he presumption that a remedy was
deliberately omitted from a statute is strongest” here,
given the Court’s reluctance to “tamper with an
enforcement scheme crafted with such evident care” as
the one regulating the securities industry. Id. (quoting
in part Northwest Airlines, Inc. v. Transport Workers,
451 U.S. 77, 97 (1981)). See e.g., Kokesh, 137 S. Ct. at
1640 & n.1 (detailing the SEC’s “panoply” of
enforcement options). When a statute “expressly
provides a remedy, courts must be especially reluctant
to provide additional remedies,” even those
traditionally considered equitable. See Sandoz Inc. v.
Amgen Inc., 137 S. Ct. 1664, 1675 (2017) (holding
injunctive relief is not available to enforce disclosure
requirement under the Biologics Price Competition and
Innovation Act (citation omitted)).
This leaves the SEC to argue that courts may order
disgorgement under one of the three enumerated
categories, or “as an ancillary remedy” in the exercise
of their more amorphous “general equity powers to
afford complete relief.” Texas Gulf Sulphur, 446 F.2d
at 1307. However, because disgorgement as “applied .
. . in the SEC enforcement context” functions as a
penalty, it does not fit neatly within any one of them.
Kokesh, 137 S. Ct. at 1644.
13
A. Disgorgement Is Not An “Injunction”
Disgorgement cannot reasonably be characterized
as an injunction.5 See Kokesh, 137 S. Ct. at 1640
(distinguishing “the Commission’s [initial] statutory
authority . . . to seek[] an injunction barring future
violations,” from its later requests for disgorgement
orders). A judgment ordering disgorgement does not
“enjoin” anything; it requires an affirmative payment
of money damages. See Meghrig v. KFC Western, Inc.,
516 U.S. 479, 484 (1996) (statute permitting an
injunction that orders a party to “take action” or
“restrain[]” further legal violations does not
“contemplate[] the award of” compensation, “whether
. . . denominated as ‘damages’ or ‘equitable
restitution’”). Whereas injunctions are “traditionally
viewed as ‘equitable,’” “[m]oney damages are, of course,
the classic form of legal relief.” Mertens v. Hewitt
Assocs., 508 U.S. 248, 255 (1993) (citing Curtis v.
Loether, 415 U.S. 189, 196 (1974) and Teamsters v.
Terry, 494 U.S. 558, 570–71 (1990)).
The SEC’s related argument—that authority to
enjoin statutory violations encompasses the power to
disgorge profits under Porter v. Warner Holding Co.,
328 U.S. 395 (1946)—is misplaced for the same reason.6
Under Porter, “[u]nless a statute . . . restricts the
court’s jurisdiction in equity, the full scope of that
5
In response to the Liu Petition, the SEC argued it may seek
disgorgement as part of its authority to “enjoin” future securities
violations under 15 U.S.C. §§ 77t(b) and 78u(d)(1). Br. in Opp. at
5. It may not.
6
See Br. in Opp. at 5.
14
jurisdiction” is generally deemed available to it. Id. at
398. But Porter permits money damages in instances
where such damages are “considered as an equitable
adjunct to an injunction decree.” Id. at 399 (emphasis
added).7 And it distinguishes disgorgement that
“restor[es] the status quo” by requiring “the return of
that which rightfully belongs” to the injured party from
statutory damages, which “differ[] greatly” and “go to
the United States Treasury.” Id. at 402. In that sense,
Porter merely provokes the same question at issue
here—whether the SEC may seek disgorgement as an
equitable remedy, even though it “bears all the
hallmarks of a penalty,” including payment to the
government. Kokesh, 137 S. Ct. at 1644. It is not a
ticket for the SEC to bypass the plain language of
carefully crafted statutory remedies. See e.g., Meghrig,
516 U.S. at 484 (declining to follow “a line of cases
holding that district courts retain inherent authority to
award any equitable remedy” even when not provided
for under statute, including Porter, supra, 328 U.S.
395).
7
Porter also involved a different statutory scheme (the Emergency
Price Control Act of 1942) which permitted the enforcing body to
seek an injunction, restraining order, “or other order” for relief as
a consequence of violations. See 328 U.S. at 397, 399 (“the term
‘other order’ contemplates a remedy other than that of an
injunction or a restraining order”). No similar “other order”
language appears in the securities laws applicable to federal court
injunctions.
15
B. Disgorgement Is Not “Equitable Relief” For
“The Benefit Of Investors”
Given that the SEC did not seek disgorgement from
Petitioners by virtue of its authority to claim civil
penalties,8 that leaves only the third option—whether
disgorgement may be ordered as “equitable relief . . .
appropriate or necessary for the benefit of investors,”
15 U.S.C. § 78u(d)(5), or “as an ancillary remedy” by
way of “the courts’ general equity powers.” Texas Gulf
Sulphur, 446 F.2d at 1307. The same framework
governs in determining whether a particular remedy is
available from either source.9
The “relief” available under § 78u(d)(5) is subject to
two limitations: it must be “equitable,” and it must be
8
In both its original and amended motions for remedies (the latter
of which it filed after Kokesh) the SEC labeled its request for
disgorgement as a distinct remedy, available independent of civil
penalties. See SEC’s Mtn. for Remedies and Entry of Judgment.
and Br. at 4-7; see also SEC’s Amend. Mtn. for Remedies and Entry
of Judgment and Br. at 4-7. The district court’s judgments against
Petitioners also identify the disgorgement orders as separate from
the orders to pay civil penalties. App.23-24. Civil penalties,
furthermore, are subject to specific statutory limits that the
district court did not apply with respect to its disgorgement order
here. 15 U.S.C. § 78u(d)(3)(B).
9
See Grupo Mexicano de Desarrollo S.A. v. All. Bond Fund, Inc.,
527 U.S. 308, 318–19 (1999) (considering the equitable jurisdiction
conferred by the Judiciary Act of 1789); see also Montanile v. Bd.
of Trustees of Nat. Elevator Indus. Health Benefit Plan, 136 S. Ct.
651, 657 (2016) and Mertens, 508 U.S. at 256 (both considering
equitable remedies available under the Employee Retirement
Income Security Act).
16
“appropriate or necessary for the benefit of investors.”
SEC disgorgement is neither.
1. Disgorgement is Not “Equitable”
By 2002, the year Congress adopted legislation
empowering the SEC to seek “equitable relief . . .
appropriate or necessary for the benefit of investors,”
15 U.S.C. § 78u(d)(5), this Court had already settled
the meaning of “equitable relief” as a statutory term of
art. See Mertens, 508 U.S. at 256.
Specifically, “‘[e]quitable’ relief must mean
something less than all relief.” Id. at 258 n.8.
“Instead,” in construing statutory remedies, “the term
‘equitable relief’ . . . must refer to ‘those categories of
relief that were typically available in equity.’” GreatWest Life & Annuity Ins. Co v. Knudson, 534 U.S. 204,
210 (2002) (quoting Mertens, 508 U.S. at 256). “The
substantive prerequisites for obtaining an equitable
remedy . . . depend on traditional principles of equity
jurisdiction.” Grupo Mexicano, 527 U.S. at 318–19
(quoting 11A Charles Alan Wright, Arthur R. Miller, &
Mary Kay Kane, Federal Practice and Procedure
§ 2941, p. 31 (2d ed. 1995) (brackets omitted)).
Accordingly, the question becomes whether the SEC’s
claimed relief “was traditionally accorded by courts of
equity.” Id. at 319.
Civil penalties, like SEC disgorgement, were not.
“Remedies intended to punish culpable individuals, as
opposed to those intended simply to extract
compensation or restore status quo, were issued by
courts of law, not courts of equity.” Tull v. United
States, 481 U.S. 412, 422 (1987); see also Loether, 415
17
U.S. at 196 (“the relief sought here – actual and punitive
damages – is the traditional form of relief offered in the
courts of law” (footnote omitted)). “Although the equity
courts could award monetary relief to make the victim
of a breach of trust whole, extracompensatory forms of
relief, such as punitive damages, were not available.”
Mertens, 508 U.S. at 270 (White, J., dissenting); see also
Porter, 328 U.S. at 402 (distinguishing statutory
damages awarded by courts “act[ing] as a court of law
rather than a court of equity,” from equitable restitution,
which “differs greatly from the damages and penalties”
available by statute).
Even the Court in Texas Gulf Sulphur—one of the
first to credit the SEC’s assertion that courts could
order disgorgement as a matter of equity10—held that
the SEC “may seek other than injunctive relief . . . to
effectuate the purposes of the [Securities Exchange]
Act [of 1934], so long as such relief is remedial relief
and is not a penalty assessment.” 446 F.2d at 1308
(emphasis added). After Kokesh, SEC disgorgement
can hardly be regarded as anything other than a
“penalty” assessment.
First, disgorgement “is imposed for punitive
purposes,” “as a consequence for violating . . . public
laws.” Kokesh, 137 S. Ct. at 1643; see also SEC v. Teo,
746 F.3d 90, 101 (3d Cir. 2014) (“All civil enforcement
actions . . . share the same general goal: ‘to maintain
public confidence in the marketplace’” (citation
10
See Kokesh, 137 S. Ct. at 1643 (citing Texas Gulf Sulphur as “one
of the first cases requiring disgorgement in SEC enforcement
proceedings”).
18
omitted)). When the SEC sought disgorgement against
Petitioners here, for example, it did not “stand[] in the
shoes of particular injured parties,” but claimed to
vindicate the rights of the “public at large.” Kokesh,
137 S. Ct. at 1643 (quoting Brief for United States at
22). See SEC v. Rind, 991 F.2d 1486, 1490 (9th Cir.
1993) (“civil enforcement actions promote economic and
social policies [wholly] independent of the claims of
individual investors”).
This undermines the lower courts’ attempt to
analogize SEC disgorgement to the “ancient remedies”
of accounting or constructive trust—equitable suits
that required the existence of a fiduciary relationship
between the parties as a condition of recovery.
Compare SEC v. Cavanagh, 445 F.3d 105, 119–120 (2d
Cir. 2006) (describing disgorgement as akin to “the
ancient remedies of accounting, constructive trust, and
restitution”); with DeLuca, 33 Rev. Banking & Fin.
Law at 914-17 (an “institutional constructive trust, like
the accounting, requires a fiduciary relationship for
liability”).
Second, the primary purpose of disgorging a
defendant’s “ill-gotten gains” is to deter future federal
securities law violations. Kokesh, 137 S. Ct. at 1643; see
also Rind, 991 F.2d at 1490 (“The Commission seeks
disgorgement in order to deprive the wrongdoer of his or
her unlawful profits and thereby eliminate the incentive
for violating the securities laws.”). “The deterrent effect
of an SEC enforcement action would be greatly
undermined if securities law violators were not required
to disgorge illicit profits.” SEC v. Fischbach Corp., 133
F.3d 170, 175 (2d Cir. 1997) (citation omitted).
19
To advance this goal, “SEC disgorgement sometimes
exceeds the profits gained as a result of the violation.”
Kokesh, 137 S. Ct. at 1644. For example, “[i]ndividuals
who illegally provide confidential trading information
have been forced to disgorge profits gained by
individuals who received and traded based on that
information—even though they never received any
profits.” Id. (citing SEC v. Contorinis, 743 F.3d 296,
302 (2d Cir. 2014) and SEC v. Warde, 151 F.3d 42, 49
(2d Cir. 1998)). See also Contorinis, 743 F.3d at 303 (a
tipper in an insider trading case who gives away
information to curry favor with another “would
unquestionably be liable to disgorge the profit;
disgorgement is required whether the insider trader
has put his profits into a bank account, dissipated them
on transient pleasures, or given them away to others”
(footnote omitted)).
In the same vein, while equity might require that
the defendant be permitted to offset any disgorged
profits by the amount of its legitimate business
expenses,11 SEC disgorgement does not. Kokesh, 137
S. Ct. at 1644–45; see also e.g., SEC v. JT Wallenbrock
& Assocs., 440 F.3d 1109, 1115 (9th Cir. 2006)
(“Neither the deterrent purpose of disgorgement nor
the goal of depriving a wrongdoer of unjust enrichment
11
See 1 Dan B. Dobbs, Law of Remedies, § 4.3(5), at 610 (2d ed.
1993) (defendant may make “appropriate deductions for expenses
. . . incurred in reaping the profits” if he can prove them); see also
Kokesh, 137 S. Ct. at 1644–45 (“As a general rule, the defendant is
entitled to a deduction for all marginal costs incurred in producing
the revenues that are subject to disgorgement.” (quoting the
Restatement (Third) of Restitution and Unjust Enrichment § 51,
cmt. h at 216)).
20
would be served were we to allow these defendants . . .
to ‘escape disgorgement by asserting that expenses
associated with this fraud were legitimate’”(citation
omitted)). “In such cases, disgorgement does not
simply restore the status quo; it leaves the defendant
worse off.” Kokesh, 137 S. Ct. at 1645.
Petitioners’ case illustrates these principles. Here
the district court ordered Petitioners jointly and
severally liable for $15,508,208 in disgorgement,
“representing proceeds gained as a result of the
conduct alleged in the SEC’s complaint.” App.23. The
Court of Appeals affirmed the district court’s decision,
citing the “overwhelming” case law prohibiting
defendants from offsetting disgorgement liability with
business expenses—even though leaving the defendant
worse off denotes a penalty, not an equitable remedy.
App.5. Coupled with the cost of civil penalties in the
same amount (which already punish), the district court
plainly ordered disgorgement of alleged profits as a
further punitive measure to deter Petitioners and the
public from violating securities laws.
2. Disgorgement is Not “For the Benefit of
Investors”
Another marker of the SEC’s use of disgorgement
punitively is that, “in many cases,” it is “not
compensatory.” Kokesh, 137 S. Ct. at 1644. As a
result, it cannot be characterized as an equitable
remedy “for the benefit of investors.” 15 U.S.C.
§ 78u(d)(5); see also Contorinis, 743 F.3d at
301(disgorgement “operates to make the illicit action
unprofitable for the wrongdoer,” and “need not serve to
compensate the victims of the wrongdoing”).
21
Indeed, this is one of the reasons this Court rejected
the SEC’s attempt to label disgorgement as a
“remedial” fix that merely restores the status quo.
Kokesh, 137 S. Ct. at 1644–45. Restitution at equity “is
limited to ‘restoring the status quo and ordering the
return of that which rightfully belongs to the [victim].’”
Tull, 481 U.S. at 424 (quoting Porter, 328 U.S. at 402).
But “[d]isgorgement does not aim to compensate the
victims of the wrongful acts, as restitution does.” SEC
v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993). “Courts
have required disgorgement ‘regardless of whether the
disgorged funds will be paid to investors as
restitution.’” Kokesh, 137 S. Ct. at 1644 (quoting
Fishbach, 133 F.3d at 176). When funds are ordered to
be paid to the government for a legal violation, as
opposed to being used to compensate the victim, “the
payment operates as a penalty.” Kokesh, 137 S. Ct. at
1644 (citing Porter, supra, 328 U.S. at 402).
Relatedly, when restitution was ordered in equity,
it typically required a claim relating to specific,
identifiable property held by the defendant. A plaintiff
could claim restitution “in equity . . . where money or
property identified as belonging in good conscience to
the plaintiff could clearly be traced to particular funds
or property in the defendant’s possession.” Knudson,
534 U.S. at 213. “A court of equity could then order a
defendant to transfer title . . . or to give a security
interest . . . to a plaintiff who was, in the eyes of equity,
the true owner.” Id. “Equitable remedies ‘are, as a
general rule, directed against some specific thing; they
give or enforce a right to or over some particular thing
rather than a right to recover a sum of money generally
out of the defendant’s assets.’” Montanile, 136 S. Ct. at
22
658–59 (quoting 4 S. Symons, Pomeroy’s Equity
Jurisprudence § 1234, p. 694 (5th ed. 1941) (ellipsis
omitted)).
By contrast, “where ‘the property sought to be
recovered or its proceeds have been dissipated so that
no product remains, the plaintiff’s claim is only that of
a general creditor,’ and the plaintiff ‘cannot enforce a
constructive trust of or an equitable lien upon other
property of the defendant.’” Knudson, 534 U.S. at
213–14 (quoting Restatement of Restitution § 215, cmt.
a, p. 867 (1936)). Under that circumstance, the
plaintiff had “merely a personal claim against the
wrongdoer” recoverable from the wrongdoer’s general
assets—“a quintessential action at law.” Montanile,
136 S. Ct. at 659 (citation omitted).
Unlike traditional equitable remedies, SEC
disgorgement requires no tracing or identification of
particular funds as “ill-gotten” profits. Rather, “[t]he
amount of disgorgement ordered need only be a
reasonable approximation of profits causally connected
to the violation,” with the “risk of uncertainty . . .
fall[ing] upon the wrongdoer.” Contorinis, 743 F.3d at
305; see also SEC v. Seghers, 298 F. App’x 319, 336 (5th
Cir. 2008) (“If the Commission shows a causal
relationship between the defendant’s wrongdoing and
the amount by which he was unjustly enriched, that
amount of money may be disgorged even if the
defendant has otherwise disposed of, reinvested, or
spent the particular assets that he wrongfully
obtained.”). SEC disgorgement, therefore, does not
involve a “requirement to replevy a specific asset,” SEC
v. Banner Fund Int’l, 211 F.3d 602, 617 (D.C. Cir.
23
2000), making the comparison to equitable restitution
inapposite.
Again, both non-equitable traits of SEC
disgorgement are evident in Petitioners’ case. The
district court ordered petitioners to pay $15,508,208 in
disgorgement with no mention of whether any of the
funds may ever be available to alleged victims. App.1618, 23-24. Nor did the courts below require the SEC to
identify any specific “ill-gotten” profits derived from
particular victims. Instead, the district court accepted
the SEC’s argument that it was simply enough to
“approximate reasonably the amount of proceeds”
causally connected to the alleged violations, even if
such funds were now mixed among Petitioners’ general
assets and could not be claimed for the benefit of
investors. App.19.
II. THE COURTS HAVE FAILED TO APPLY
KOKESH CONSISTENTLY
The Liu Petition makes the case that the lower
courts have struggled in applying Kokesh and require
further guidance. They do. And the Fifth Circuit’s
decision—which the Court of Appeals issued after this
Court granted the Liu Petition—demonstrates that
fact. Further, because the scope of authority to order
equitable remedies has implications beyond
disgorgement alone, and beyond the SEC alone, these
considerations also favor holding the petition here
pending the outcome in Liu.
24
A. The Circuit Courts Continue to Treat
Disgorgement as an Equitable Remedy
In the years since Texas Gulf Sulphur, the lower
courts have largely regarded SEC disgorgement as an
equitable remedy. See e.g., Huffman, 996 F.2d at 802
(disgorgement “is an equitable remedy meant to
prevent the wrongdoer from enriching himself by his
wrongs”); Teo, 746 F.3d at 103 (“Since disgorgement
primarily serves to prevent unjust enrichment, the
court may exercise its equitable power only over
property that is causally related to the wrongdoing.”
(quoting SEC v. First City Fin. Corp., 890 F.2d 1215,
1231 (D.C. Cir. 1989)); Cavanagh, 445 F.3d at 120
(“Because chancery courts possessed the power to order
equitable disgorgement in the eighteenth century, we
hold that contemporary federal courts are vested with
the same authority”); Wallenbrock & Assocs., 440 F.3d
at 1113 (“the district court has broad equity powers to
order the disgorgement of ‘ill-gotten gains’ obtained
through the violation of federal securities laws”); SEC
v. MacDonald, 699 F.2d 47, 54 (1st Cir. 1983)
(“Disgorgement is remedial and not punitive. The
court’s power to order disgorgement extends only to the
amount with interest by which the defendant profited
from his wrongdoing. Any further sum would constitute
a penalty assessment.” (citation omitted)).
Of course, Kokesh undercut this precedent.
Analyzing “how SEC disgorgement operates in
practice,” 12 this Court concluded that SEC
disgorgement seeks to redress a wrong against the
12
SEC v. Gentile, 939 F.3d 549, 557 (3d Cir. 2019).
25
public, is imposed “for the purpose of punishment,” and
meant “to deter others from offending in a like
manner.” Kokesh, 137 S. Ct. at 1642. Because
disgorgement “go[es] beyond compensation” and is
“intended to punish and label defendants wrongdoers,”
it is a civil penalty—not an equitable, remedial one. Id.
at 1645 (citations omitted).
Some judges have recognized that Kokesh changed
the lens through which courts view the SEC’s remedial
powers. The Third Circuit, for instance, recently
applied Kokesh in considering whether an SEC “obeythe-law” injunction was also subject to the 5-year
limitations period in § 2462. SEC v. Gentile, 939 F.3d
549, 563 (3d Cir. 2019). Though the court concluded it
did not, it warned the district court not to “rubberstamp” the SEC’s request for such an injunction
“simply because it has been historically permitted to do
so by various courts.” Id. at 565. “After all . . . the
landscape for SEC enforcement actions [is]
significantly different . . . today” than it was 40 years
ago. Id. (citing Kokesh, 137 S. Ct. at 1640).
Justice Kavanaugh’s concurring opinion in Saad v.
SEC, 873 F.3d 297 (D.C. Cir. 2017), is another
example. Saad involved a dispute over the SEC’s
decision to permanently ban the defendant from
registering with the Financial Industry Regulatory
Authority (FINRA). But as then-Judge Kavanaugh
noted, “Kokesh was not limited to the specific statute at
issue there.” Id. at 305 (Kavanaugh, J., concurring).
To the contrary, “the Supreme Court’s decision in
Kokesh overturned a line of cases from [the D.C.
Circuit] that had concluded that disgorgement was
26
remedial and not punitive.” Id. When the SEC
requests a punitive sanction, it is “no longer able to
simply waive the ‘remedial card’ and . . . evade judicial
review of the harsh sanctions they impose on specific
defendants.” Id. at 306.
Likewise, in the Ninth Circuit, Judge O’Scannlain
has cited Kokesh in questioning that court’s
“unfortunate interpretation” of the Federal Trade
Commission Act—which currently permits district
courts to issue orders for money judgments “styled as
‘restitution’” under a statutory grant that, on its face,
authorizes only “injunction[s].” FTC v. AMG Capital
Mgmt., LLC, 910 F.3d 417, 429 (9th Cir. 2018)
(O’Scannlain, J., specially concurring).13 As he sees it,
Kokesh “undermines a premise in our reasoning: that
restitution . . . is an ‘equitable’ remedy at all.” Id. And
in the Sixth Circuit, Judge Merritt has observed that
“the theory [of equitable disgorgement] may not even
be applicable in SEC contexts for much longer in light
of” Kokesh. See Osborn v. Griffin, 865 F.3d 417, 471
n.1 (6th Cir. 2017) (Merritt, J., dissenting) (“Lord Coke,
Blackstone, Justice Story, and other distinguished
lawyers . . . would never have heard of ‘equitable
disgorgement.’” (citing Colleen P. Murphy,
Misclassifying Monetary Restitution, 55 SMU L. Rev.
1577, 1598-1600 (2002)).
13
Judge Bea joined Judge O’Scannlain’s special concurrence. See
id.
27
Kokesh notwithstanding, lower courts have adhered
to pre-Kokesh precedent in still issuing and affirming
SEC disgorgement orders. See e.g., AMG Capital
Mgmt, supra, 910 F.3d at 427; SEC v. Hall, 759 F.
App’x 877, 882 (11th Cir. 2019) (per curiam); SEC v. de
Maison, 785 F. App’x 3, 6 (2d Cir. 2019); SEC v.
Ahmed, 343 F. Supp. 3d 16, 27 (D. Conn. 2018); SEC v.
Brooks, 2017 WL 3315137, at *6–8 (S.D. Fla. Aug. 3,
2017). As the Fifth Circuit did here, App.6-10, some of
these courts point to footnote three as proof that
Kokesh has no application outside the statute-oflimitations context.14 E.g., AMG Capital Mgmt, 910
F.3d at 427; see also de Maison, 785 F. App’x at 6; Liu,
754 F. App’x at 509 (“Kokesh expressly refused to reach
this issue”); Ahmed, 343 F. Supp. 3d at 27 (“nothing in
Kokesh disturbed Second Circuit precedent that
disgorgement is a proper equitable remedy”); Brooks,
2017 WL 3315137, at *8 (“Kokesh’s holding cannot be
plucked from the statutory context that gives it force”).
Unlike Kokesh itself, however, this narrow
reasoning ignores the manner in which SEC
disgorgement “operates in practice.” Gentile, 939 F.3d
at 557. In reality, “nothing about shifting the frame of
analysis from the limitations period to the authority
and power perspective changes the basic fact that
disgorgement as used in SEC cases is intended to
remedy a harm to the public rather than to compensate
specific victims.” Bainbridge, 56 Wash. U. J.L. & Pol’y
at 26. SEC disgorgement does not become any less a
14
With that said, the Fifth Circuit appears to be the only circuit
thus far to further insist on the limits of footnote three after this
Court’s grant of certiorari in Liu.
28
punishment or a deterrent when considering whether
district courts have the power to issue it. Id.; see also
Saad, 873 F.3d at 305 (“Kokesh was not limited to the
statute at issue there”) (Kavanaugh, J., concurring).
Beyond that, continued adherence to Texas Gulf
Sulphur risks overlooking intervening legislation and
precedent that may have changed the calculus of that
1970 decision. For example, when Congress enacted
the Securities Enforcement Remedies and Penny Stock
Reform Act in 1990, it authorized the SEC to recover
civil penalties for securities violations that “are the
functional equivalent of disgorgement.” Bainbridge, 56
Wash. U. J.L. & Pol’y at 26; see also 15 U.S.C.
§ 78u(d)(3)(B) (listing tiers of civil penalties for most
securities violations and permitting penalties up to the
“gross amount” of the defendant’s “pecuniary gain”).
One can question why the SEC should be free to pursue
the unauthorized remedy of disgorgement when
Congress has explicitly authorized a largely equivalent
one. See Cent. Bank of Denver, N.A. v. First Interstate
Bank of Denver, N.A., 511 U.S. 164, 184 (1994) (“The
fact that Congress chose to impose some forms of
secondary liability, but not others, indicates a
deliberate congressional choice with which the courts
should not interfere.”). Even more to the point, that
Act also expressly authorized the SEC to request
disgorgement in agency administrative proceedings,
but not in federal court enforcement proceedings. 15
U.S.C. §§ 77h-1(e), 78u-2(e). “Had Congress intended
to” permit court-ordered disgorgement in the civil
29
setting, “it presumably would have done so expressly.”
Sandoz, 137 S. Ct. at 1677 (citation omitted).15
Texas Gulf Sulphur also stands on the shoulders of
earlier Supreme Court precedent creating implied
rights of action under the federal securities or other
federal laws. Bainbridge, 56 Wash. U. J.L. & Pol’y at
27; see also Mills v. Elec. Auto-Lite Co., 396 U.S. 375,
391 (1970) (“we cannot fairly infer from the Securities
Exchange Act of 1934 a purpose to circumscribe the
courts’ power to grant appropriate remedies”); Mitchell
v. Robert DeMario Jewelry, Inc., 361 U.S. 288, 295
(1960); accord Porter, 328 U.S. at 402.16 But this
Court’s more recent decisions trend in the opposite
direction. See e.g., Cent. Bank of Denver, 511 U.S. at
184; see also FTC v. Credit Bureau Ctr., LLC, 937 F.3d
764, 779 (7th Cir. 2019) (“The Supreme Court’s
understanding of implied remedies evolved after Porter
and Mitchell. . . In particular, the Court now
recognizes the importance of Congress’s choice to
specify forms of relief.” (citations omitted)). Modern
cases reflect a greater hesitance to “engraft a remedy
on a statute, no matter how salutary, that Congress did
not intend to provide.” California v. Sierra Club, 451
15
In apparent recognition of this omission, the Unites States
Senate is considering a bill (already passed by the House) that
would explicitly grant to the Commission the authority to seek
disgorgement in addition to civil monetary penalties in
enforcement actions. See Investor Protection and Capital Markets
Fairness Act, H.R. 4344, 116th Cong. § 2 (2019), available at
https://congress.gov/bill/116th-congress/house-bill/4344/text.
16
See Texas Gulf Sulphur, supra, 446 F.2d at 1308 (citing these
cases).
30
U.S. 287, 297 (1981); see also Knudson, 534 U.S. at 220
(“vague notions of a statute’s ‘basic purpose’ are
nonetheless inadequate to overcome the words of the
text regarding the specific issue under consideration”
(citation omitted)); see also Sandoz, 137 S. Ct. at 1675
(“The remedy provided by [statute] excludes all other
federal remedies, including injunctive relief.”).
In short, this Court was right to intervene in Liu to
dispel the lower courts’ confusion and determine
whether the district courts may, in fact, issue a remedy
grounded in now-dubious authority. Petitioners here
seek to benefit from the Court’s resolution of this
frequently litigated question.
B. The SEC and Numerous Other Agencies
Collect Billions in Unauthorized
Disgorgement Penalties
Finally, the Liu Petition correctly observes that the
SEC routinely collects “billions” in unauthorized
disgorgement penalties, and that numerous other
agencies are in the habit of seeking “equitable
disgorgement.” 2019 WL 2354737, at *13, *20. Both
points likewise favor holding the Petitioners’ case
pending the outcome in Liu.
Between 2009 to 2012 for example, courts awarded
the SEC $3.273 billion in civil penalties, but more than
double that amount—$7.9 billion—in disgorgement.
DeLuca, 33 Rev. Banking & Fin. L. at 931. This
substantial financial impact is also reflected in
Petitioners’ case, where the district court’s
disgorgement order effectively doubled their liability
from roughly $15 million to $30 million. That the SEC
31
may prefer this more lucrative penalty makes sense;
disgorgement is not subject to the same limitations as
statutory civil penalties, see 15 U.S.C. § 78u(d)(3)(B).
Further, the showing required to disgorge a certain
amount of profits is relatively minimal; the amount
disgorged “need only be a reasonable approximation of
profits causally connected to the violation.” Contorinis,
743 F.3d at 305. And it was not until this Court’s
pronouncement in Kokesh that disgorgement became
subject to the five-year limitations period. 137 S. Ct. at
1645.
Clarifying Kokesh, moreover, will have an impact
beyond disgorgement as an enforcement mechanism,
and beyond the SEC as an agency. Then-Judge
Kavanaugh has already found that “Kokesh was not
limited to” § 2462, and may require the SEC to justify
other particularly harsh punitive sanctions, instead of
“waiv[ing] the ‘remedial card’” to “evade judicial
review.” Saad, 873 F.3d at 306 (Kavanaugh, J.,
concurring). The Third Circuit has considered whether
Kokesh applies to SEC injunctions. Gentile, 939 F.3d at
563. And judges on the Ninth Circuit have suggested
Kokesh requires a reconsideration of that circuit’s
precedent on remedies available under the FTCA.
AMG Capital Mgmt., 910 F.3d at 429 (O’Scannlain, J.,
specially concurring). With “[n]early 100 statutes”
empowering the courts to fashion some form of
equitable relief, the Liu Petition notes that defining the
scope of that authority—to check not only the lower
courts, but the SEC and other agencies—is critical.
2019 WL 2354737, at *20–22. Petitioners agree.
32
CONCLUSION
For the foregoing reasons, this Court should hold
the petition pending its decision in Liu and dispose of
the petition in a manner consistent with Liu’s
resolution.
Respectfully submitted,
JACOB S. FRENKEL
SCOTT A. MACGRIFF
DICKINSON WRIGHT PLLC
1825 I Street N.W.
Suite 900
Washington, D.C. 20006
(202) 466-5953
PHILLIP J. DEROSIER
Counsel of Record
DICKINSON WRIGHT PLLC
500 Woodward Ave.
Suite 4000
Detroit, MI 48226-3425
(313) 223-3500
PDeRosier@dickinson-wright.com
LAUREN A. KWAPIS
DICKINSON WRIGHT PLLC
2600 W. Big Beaver Rd.
Suite 300
Troy, MI 48084
(248) 433-7527
Counsel for Petitioners
January 31, 2020
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.