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Abstract

What empowers the U.S. Securities and Exchange Commission to seek, and federal district courts to order, the disgorgement of ill-gotten gains from securities law violators? The short answer, which stood virtually un- challenged for nearly forty-six years, is that federal courts may award disgorgement, at the request of the SEC, pursuant to the broad equitable powers that Congress conferred in the jurisdictional provisions of the federal securities laws. During the 2017 oral argument in Kokesh v. SEC, however, five Justices of the U.S. Supreme Court interjected statements ex- pressing varying degrees of skepticism. The tenor of the questions during the Kokesh argument, as well as the Court’s unanimous decision concerning disgorgement’s punitiveness and its opaque footnote disclaiming any view of the judicial power to award the SEC disgorgement, has ignited a firestorm. Pending litigation includes a class action lawsuit seeking to re- cover a combined total of at least $14.9 billion in disgorgement payments that the SEC is alleged to have improperly collected.

That a majority of the Supreme Court might be puzzled over the source of authority for court-ordered SEC disgorgement is itself puzzling. Two years prior to Kokesh, in its exercise of original jurisdiction in Kansas v. Nebraska, the Supreme Court drew upon its own equitable powers to order disgorgement, in addition to the payment of compensatory damages, as a remedy for the violation of an interstate water compact that has the status of federal law. Although the Court split 6-3 as to whether such disgorgement was warranted to deter future “misbehavior,” the Justices were unanimous in the view that disgorgement was an equitable remedy. The Kansas majority also emphasized that a court’s equitable powers are particularly broad and flexible when the public interest in the enforcement of a federal law is involved. The five Justices’ skepticism during the Kokesh argument is likewise puzzling because while the disgorgement remedy in SEC enforcement actions began as interstitial lawmaking pursuant to § 27 of the Securities Exchange Act of 1934’s broad jurisdictional provision, Congress has subsequently ratified, and in some instances codified, that disgorgement remedy in six securities statutes enacted between 1984 and 2010.

This essay has two principal goals. One is to elucidate the incontestable statutory authority for court-ordered disgorgement in SEC enforcement actions. Its other goal is to draw on the Kansas decision to show that such disgorgement is a statutorily authorized equitable remedy, even in instances when it constitutes a penalty under the Kokesh criteria.

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