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SEC Disgorgement Win Bolsters Ability to Recoup Ill-Gotten Gains

Aug. 17, 2022, 9:00 AM

A Florida federal judge’s decision that transfer agent Island Stock Transfer Inc. must pay nearly $115,000 in disgorgement gives the SEC more legal ammunition to go after ill-gotten gains.

Congress last year expanded the Securities and Exchange Commission’s authority to pursue disgorgement even when victims of securities fraud won’t benefit from the payment—effectively overriding a US Supreme Court ruling that curtailed the SEC’s enforcement remedies, a district court judge found.

The Aug. 10 decision may be the first to directly address the issue. While not binding on other district courts, the decision gives the SEC a ruling to highlight when arguing for disgorgement in cases where it’s hard to identify or prove that specific individuals were harmed, including in insider trading.

“This ruling will be viewed as a significant development and certainly it’s one ruling that the SEC can cite now for this proposition,” said Amy Jane Longo, partner in Ropes & Gray’s litigation & enforcement practice group.

The defendants plan to appeal to the US Court of Appeals for the Eleventh Circuit.

Benefit of Investors

The legal fight over disgorgement began after a jury, in July 2021, found Island Stock, its sister company, Spartan Securities Group Ltd., and two of their principals made misleading statements or omissions in connection with the purchase or sale of securities. Spartan and the other defendants were cleared of more than a dozen other counts.

The SEC said it would seek disgorgement against Island, even though identifing specific investors who were harmed wasn’t possible. The reclaimed money would go to the US Treasury.

An earlier Supreme Court ruling, Liu v. SEC, held that disgorgement can only be pursued when victims of securities fraud would benefit from the disgorgement. But the 2020 decision left open the question of whether disgorged funds can be deposited into the Treasury when victims couldn’t be identified.

If courts were to strictly apply Liu and find that the SEC can’t get disgorgement unless it identifies victims, then the agency would have “a vast array of cases where there would be no disgorgement,” Elisha Kobre, a partner in Bradley Arant Boult Cummings LLP’s government enforcement and investigations and litigation practice groups, said.

A few months after Liu, Congress expressly granted the SEC the ability to pursue disgorgement for unjust enrichment related to securities fraud through amendments passed as part of the fiscal 2021 National Defense Authorization Act.

The amendments, however, were silent on whether the funds must be returned to investors, raising questions about whether the SEC had more freedom to deposit funds into the Treasury.

The SEC argues that the NDAA gave the courts “greater flexibility to determine where collected disgorged funds may be distributed.” Island Stock countered that the SEC’s interpretation was at odds with broader language in the statute.

Ruling that the disgorged funds could be sent to the Treasury, U.S. District Judge Virginia Hernandez Covington of the Middle District of Florida ordered Island to disgorge $114,520.

The NDAA amendments “explicitly provides this Court the ability to order disgorgement and does not require that such disgorgement be ‘for the benefit of investors,’” Covington said.

`Going to Percolate’

Whether Congress intended to expand the SEC’s authority in this way —as it tucked the disgorgement amendments into the massive NDAA—remains unclear, attorneys said.

Attorneys at Sidley Austin LLP have noted the relevant language was introduced before the Supreme Court even agreed to hear Liu. They suggested, in a 2021 article, that the language was a response to an earlier high court ruling, Kokesh v. SEC, which raised questions about the SEC’s authority to obtain disgorgement at all.

“The issue about money going to investors was really a Liu issue,” said Kobre. “You wonder whether that was something Congress anticipated or not.”

Appellate courts have so far avoided the question.

The U.S. Court of Appeals for the Fifth Circuit in an October ruling didn’t address the SEC’s argument that the new law superseded Liu‘s limits to only pursue “equitable relief.”

The U.S. Court of Appeals for the Tenth Circuit, a couple of months later, said it left “for another day whether the amendments permit “for disgorgement as a statutory-based remedy in law.”

Questions about what disgorgement looks like after the NDAA aren’t expected to go away.

“I think this is an issue that’s going to percolate through the courts for the next couple of years,” said Kara Rollins, an attorney at the nonprofit New Civil Liberties Alliance who represents Island and the other defendants.

Identifying Victims

Covington, as an alternate basis for her ruling, said that even if courts are still required to balance equities under Liu, the result in the Island case weighed in favor of disgorgement and allowing the money to be sent to the Treasury.

“Between the money staying with Island, a key player in a scheme to put dubious equities on the market, or a fund at the Treasury, it is more equitable to order disgorgement,” the judge wrote, noting that the Eleventh Circuit hasn’t provided guidance on the topic.

Disgorgement is viewed as an important tool by the SEC. Attorneys expect the agency will lean into the NDAA, while also arguing that the balance of equities favors disgorgement, in future cases where victims can’t be identified.

“I think the Commission will see it as important to have one ruling going in this direction, because the SEC files a lot of market integrity cases, where it may not be feasible to identify specific victims,” Longo said.

To contact the reporter on this story: Matthew Bultman in New York at

To contact the editors responsible for this story: Melissa B. Robinson at; Roger Yu at