Limiting SEC disgorgement

The law and accounting of “legitimate” expenses after SEC v. Liu

May 11, 2021
Risk governance Financial investigations

In June 2020’s SEC v. Liu, the United States Supreme Court determined that the commission has authority under federal securities laws to seek disgorgement in federal courts as an equitable remedy, but awards must be limited to the defendants’ net profits. The court remanded the case to determine whether the damage award was appropriately restricted, but offered only limited guidance of what “legitimate expenses” can be deducted from gross proceeds from fraud to determine the ill-gotten gains subject to disgorgement.

For example, one issue left open is how courts should treat the wrongdoer’s overhead expenses. However, these decisions may be best understood through an accounting lens.

Read our white paper for an in-depth analysis from lawyers and accountants that explore Liu’s guidance of potential “legitimate expenses,” and how accounting can help provide answers about how the courts should approach several different scenarios involving different types of business expenses—both direct and indirect. Examples include a common Ponzi scheme, as well as fraud involving a portion of investment proceeds and more complex situations that involve a portion of the business with common overhead.   

Ultimately, the Liu decision provides an opportunity for defense counsel and forensic accountants to argue for meaningful reductions in disgorgement that must be limited to net profits.

This white paper is co-authored by RSM and Goodwin Procter.

RSM contributors

  • Chris Ekimoff
    Chris Ekimoff
  • Chuck Torrisi