Clean Hands, Dirty Money, and the Codification of SEC Disgorgement

Authors

• Stephanie Palma, Fordham University School of Law

Keywords

Disgorgement; Relief Defendants; Nominal Defendants; Securities Enforcement; Equitable Remedies; Unjust Enrichment; Ancillary Relief; Statutory Interpretation; Securities And Exchange Commission

Abstract

Disgorgement is the U.S. Securities and Exchange Commission’s (SEC) most powerful enforcement tool and among its most controversial. For decades, federal courts treated disgorgement in securities enforcement actions as an equitable remedy, a view that the U.S. Supreme Court confirmed in Liu v. SEC. Months after Liu, Congress passed the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, which codified disgorgement in SEC enforcement actions. The codification of disgorgement sparked a circuit split between the U.S. Courts of Appeals for the Fifth and Second Circuits over whether Congress created a new statutory form of the remedy. This split, however, has focused exclusively on wrongdoers, leaving unresolved how the codified remedy affects relief defendants, who are traditionally required to disgorge only funds that satisfy a two-part equitable test.

This Note fills that doctrinal gap by extending both circuit interpretations to relief defendants. Extending the Fifth Circuit’s expansionist view could displace the two-part test and convert disgorgement into a forfeiture tool that reaches nonwrongdoers. Extending the Second Circuit’s continuity view would preserve the two-part test but may leave enforcement gaps that allow wrongdoers to dissipate funds before SEC recovery.

This Note argues that courts should not extend the expansionist view to relief defendants for two reasons. First, the relief-defendant doctrine cannot be severed from its equitable foundation without undermining the principles that justify compelling recovery from nonwrongdoers. Second, absent clear statutory authority, extending broad disgorgement to parties who have not violated securities laws would raise due process concerns. Courts should, therefore, preserve the equitable two-part test absent a clear congressional mandate.

Recommended Citation

Stephanie Palma, Clean Hands, Dirty Money, and the Codification of SEC Disgorgement, 94 Fordham L. Rev. 2421 (2026).
Available at: https://ir.lawnet.fordham.edu/flr/vol94/iss6/9