SEC Enforcement: Does Disgorgement Have a Date with Destiny?

Abstract

Even before the promulgation of The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (SERPSRA), the U.S. Securities and Exchange Commission (SEC or Commission) was entitled to seek disgorgement. Since 1971, the courts have been explicating the remedy as applied in the SEC enforcement context, and much of the doctrinal development had taken place by the time the SERPSRA was enacted. However, the doctrine of disgorgement as applied in the SEC enforcement context is not entirely settled. Increasingly, the defense bar is finding acquiescence by certain jurisdictions to offsetting disgorgement by a defendant's costs and expenses. Such costs have been deemed to fall within one of two categories, (1) Direct or Transactional Costs, and (2) General Business expenses. Earlier in the same year the SERPSRA was passed, a recondite case out of the Western District of New York held that business expenses were legitimate offsets to disgorgement. This was when the doctrinal development went AWOL. This paper seeks to explore the concept of equity embodied in the securities laws as intended by Congress. Accordingly, this paper asks whether Congress intended to codify the traditional common law notions of equity in disgorgement, or is the SEC's disgorgement sui generis. To answer this question, the philosophy behind disgorgement is exhaustively fleshed out through a historical case analysis. Next, the paper establishes what the author believes to be a new concept, the theory of regulatory equity. Following the establishment of this theory, the practice of offsetting disgorgement is analyzed to see whether it is faithful to this new concept of equity. The paper then considers examples of offsetting which have enjoyed the imprimatur of the Court, and explains why the practice is illegitimate. Finally, the author asks whether the grave need for meaningful and effective fraud deterrence in the investment industry and the vast inconsistency in how disgorgement is applied in these contexts warrants certiorari by the Supreme Court of the United States.