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Taking a break from COVID-19 news

Jun 23, 2020

We are taking a break from COVID-19 news today and focusing on two recent cases, one just decided and one just filed. That does not mean we can “take a break” from COVID-19…stay safe out there!

Supreme Court Decision Allows SEC to Continue Collecting Disgorgement Awards

The Supreme Court has issued a flurry of decisions over the past few weeks. Monday 6/22, an 8-1 majority of the Court handed the Securities and Exchange Commission a victory, holding that disgorgement can qualify as equitable relief (relief that the SEC is allowed to seek in civil proceedings). The case, Liu et al. v. Securities and Exchange Commission arose out of a 2017 SEC enforcement action in which the regulator ordered the disgorgement of close to $27M from the petitioners. In turn, petitioners appealed the order, “arguing that securities law did not actually allow the agency to seek disgorgement as a form of equitable relief for victims, since it has been used as a penalty intended to do wrongdoing.”

Despite the fact that the Supreme Court had previously held in Kokesh v. SEC that “a disgorgement order in a(n)…SEC…enforcement action constitutes a ‘penalty’ for purposes of the statute of limitations”, the Kokesh decision did not “address whether disgorgement can qualify as ‘equitable relief’…given that equity historically excludes punitive sanction.”

In the Liu case, the SEC targeted petitioners alleging that they had fraudulently raised money from investors. The SEC ordered the disgorgement of the full amount of such monies. The petitioners disagreed, and argued in the lower courts “that the disgorgement remedy failed to account for legitimate business expenses.” The District Court was not persuaded and found (with the Ninth Circuit affirming) that the petitioners were jointly and severally liable for the full amount of the capital raised from the investors.

The case was appealed to the Supreme Court which held that “(a) disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under” the law. As the lower Courts did not address critical issues, including whether or not the expenses that the fraudsters wanted deducted from the award were legitimate, the Supreme Court vacated the underlying judgment and remanded the case “to ensure that the award” was appropriately limited.

Tesla’s Board Sued Derivatively:

Last week, the Police and Fire Retirement System of the City of Detroit sued Elon Musk and other current and former directors seeking “repayment of what it said were years of ‘outrageous’ board stock awards that costs the company hundreds of millions of dollars.” The plaintiff <accuses?>alleges that “Musk, Tesla’s largest shareholder, and the company’s nine-member board of…lining up director pay and stock option benefits valued at an average $8.7 million in 2018 alone—more than 29 times higher than the average for S&P index company boards.”

The complaint digs in to Musk’s domination of the company, and, as a result, the board’s lack of independence. Interestingly, the complaint makes specific reference to Musk’s recent decision to “fund (D&O) liability insurance (see our post of May 3, 2020)… making the company’s board beholden for protection from personal liability for conduct as directors…’Allowing Musk to personally serve as the board’s D&O insurer brings the entire board under the yoke. Any offer to compromise an action to recover for a breach of the directors’ fiduciary duties, including this litigation, is now wholly determined by Musk’s personal whim, and not an independent insurer’”.

We will monitor developments in both the remanded SEC matter and the Telsa derivative action.


Dean Seal, High Court Preserves SEC Disgorgement, With Limits, Law360, June 22, 2020.

Liu et al. v. Securities and Exchange Commission, 591 U.S. ___ (2020)

Jeff Montgomery, Musk, Tesla Board Sued in Chancery Over ‘Egregious’ Pay, Law360, June 18, 2020.


Carrie O’Neil

Senior Vice President Legal & Claims


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