Disgorgement Accounting After Liu v. SEC in Securities Enforcement Cases

Abstract

In Liu v. the Securities and Exchange Commission (SEC), the Supreme Court determined that disgorgement remedies for SEC civil penalties shall be limited to the defendant's “net profits.” This holding changes the calculus for award determinations in billions worth of corporate and individual defendant settlements with the SEC every year.

Much of the back and forth in those negotiations has been felt in private settlement conferences with the SEC, where many defendants make individual arguments about the limits on a disgorgement penalty using accounting expertise. This is the first article to systematically link the precedent and guidance available in the remedies treatises cited by the Supreme Court in Liu v. SEC and related lower court opinions expanding on Liu and to then link those concepts to fundamental accounting and finance principles.

The result is an article at the intersection of securities law and accounting that links those two literatures together to contribute to the law and accounting literature generally. This article further serves as a guide for the SEC and defendants in shaping the billions of dollars in disgorgement remedies that those parties negotiate every year.

Keywords: Liu v. the Securities and Exchange Commission, SEC, securities law, disgorgement remedies

JEL Classification: K2, K20, K22