Supreme Court limits power of SEC to recoup illegal gains

The Supreme Court limited the power of the Securities and Exchange Commission to recoup illegal profits from wrongdoers, putting new curbs on one of the agency’s most potent legal weapons.

The 8-1 ruling Monday is a partial victory for a California couple ordered to pay $27 million after being found to have defrauded investors.

The justices said the SEC can win “disgorgement” in federal court if the money can be used to reimburse defrauded investors and is capped at the wrongdoer’s net profits. But the court also suggested that awards can’t go further, putting a new constraint on the agency’s enforcement efforts.

Disgorgement is a traditional tool used by judges to return wrongful gains to the victims. It’s distinct from SEC fines, which the SEC can also seek and which can be used as punishment.

The SEC typically wins more than $1 billion a year in disgorgement orders in federal court. The ruling didn’t directly affect the SEC’s separate authority to seek disgorgement through administrative proceedings.

Justice Sonia Sotomayor wrote the court’s majority opinion. Justice Clarence Thomas dissented, saying he would have gone further and barred the SEC from seeking disgorgement at all in federal court.

The case is Liu v. Securities and Exchange Commission, 18-1501.

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