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SEC Racks Disgorgement Win as Questions Linger on Relief Powers

Oct. 15, 2021, 2:57 PM

A recent federal court ruling awarding $3 million to investors harmed by an energy company’s penny stock scheme offers a model for the SEC to win disgorgement penalties after the U.S. Supreme Court slapped limits on the agency’s enforcement remedies last year.

The U.S. Court of Appeals for the Fifth Circuit affirmed a lower court’s ruling that the SEC had properly sought disgorgement and interest against Treaty Energy Corp. and its officers, saying the case “easily satisfies” the high court’s decision in Liu v. SEC.

Liu held that the SEC can’t pursue disgorgement in civil cases beyond the net profits gained by the alleged wrongdoing, and only when victims of securities fraud would benefit from the disgorgement. The Fifth Circuit said the SEC passed the Liu test in part because the commission had taken multiple steps to identify specific individuals defrauded by Treaty Energy executives.

“We’re going to see a lot of lower courts applying a very practical, fact-specific solution,” to cases involving the SEC’s disgorgement authority, said Richard Marshall, former branch chief of the SEC’s Enforcement Division in Washington.

“A lot of times, I think the SEC’s going to prevail,” said Marshall, now a partner at Katten Muchin Rosenman LLP in New York.

First Post-Liu Decision

The agency’s Oct. 12 Fifth Circuit win against Treaty Energy in SEC v. Blackburn is the first instance of a lower court providing some answers about applying the Liu decision, Marshall said.

The SEC said the New Orleans-based company and its executives ran a scheme in which they claimed to have struck oil in Belize in order to manipulate the company’s stock price as they illegally sold restricted shares to the public. Company founder Ronald L. Blackburn, CEO and later chief operating officer Bruce A. Gwyn, and corporate secretary and investor relations consultant Michael A. Mulshine argued that disgorgement judgments against them should be tossed because of Liu.

The Supreme Court ruling made it difficult for the SEC to win disgorgement in cases where it’s harder to identify or prove that specific individuals were harmed, such as insider trading. Liu also called into question whether disgorgement deposited into the U.S. Treasury for future payment to not-yet identified investors would pass muster under the court’s analysis.

The Fifth Circuit said the SEC identified the specific illicit profits each of the three men had gained, and created a process to return disgorged funds to specific victims. “Because the SEC has already identified the defrauded Treaty investors, it is certainly feasible—more than that, it is the plan—that money the defendants return will go to the harmed investors,” Judge Gregg Costa wrote for the appellate panel.

“It would be hard to find a case more squarely within Liu than this one,” said Urska Velikonja, a professor at Georgetown University Law Center. If the SEC didn’t win this one, then I’m not sure the SEC could ever win” she said.

The SEC also said the executives failed to disclose Blackburn’s involvement in running the company behind the scenes, a material omission considering his prior conviction for four federal tax felonies and a $1 million settlement over a claim he misappropriated funds from another company he ran that went bankrupt.

The SEC said Blackburn was running Treaty, but that executives avoided ever mentioning his name in public securities filings.

Liu Superseded?

But the Fifth Circuit didn’t answer a more pressing question about whether Congress overrode the Liu decision late last year.

Tucked into the massive National Defense Authorization Act for fiscal 2021 was an amendment to the SEC’s civil disgorgement authorities, expressly granting the agency the ability to pursue disgorgement for unjust enrichment related to securities fraud.

The SEC argued in Blackburn that the new law superseded Liu‘s limits to only pursue “equitable relief.” The Fifth Circuit declined to address that argument because the lower court had already met the requirements of Liu.

That leaves other courts to decide whether Congress expanded the SEC’s authority “in a way that obviates Liu,” said Charles Riely, a partner in Jenner & Block’s investigations, compliance, and defense practice and former assistant regional director for the SEC’s Enforcement Division.

“The SEC has won this case on this issue, but we expect litigants to craft arguments to challenge the SEC’s authority to seek disgorgement” for years to come, he said.

The case is SEC v. Blackburn, 2021 BL 388953, 5th Cir., No. 20-30464, 10/12/21.

To contact the reporter on this story: Lydia Beyoud in Washington at

To contact the editors responsible for this story: Michael Ferullo at; Laura D. Francis at