The Evolution of Securities Class Action Law: The SEC’s Role in Compensating Investors

The SEC is the primary government agency that enforces securities laws, and it has many tools to make life difficult for companies that have engaged in fraud. One of the SEC’s oldest tools is disgorgement, which consists of recouping a company’s ill-gotten gains.

 The SEC has long been able to seek disgorgement by suing corporations in federal court. The Remedies Act of 1990 also gave the SEC the ability to seek disgorgement through administrative proceedings, which are brought before the SEC’s own judges. Disgorgement is an equitable remedy, meaning that it is a flexible tool separate from traditional damages awards. However, it is limited to the amount of money that would return the wrongdoer to the position they would be without the fraud.

 The Remedies Act of 1990 also addressed a concern that disgorgement alone does not penalize companies enough to truly deter their wrongful conduct. It gave the SEC the ability to seek monetary penalties, both in federal courts and in administrative proceedings. Although there were still restrictions on the amount of penalties that could be sought, the SEC now had significant leeway to impose penalties beyond the amount necessary to recoup ill-gotten gains.

 However, the Remedies Act instructed that the penalty money be given to the Treasury, and it could not be given back to the victims. Thus, deterrence was prioritized over compensation. Monetary penalties served the purpose of punishing wrongful conduct, but the penalties did not provide relief to investors who had been harmed by the fraud.

 Read the full article to learn how the Sarbanes–Oxley Act of 2002 and Liu v. SEC (2020) authorized the SEC to direct penalty money to investors impacted by fraud and added two important requirements that must be met for disgorgement to be considered equitable relief.