Liu v. Securities and Exchange Commission,  the U.S. Supreme Court decision this week affirming the SEC’s right to seek disgorgement,  displayed a striking consensus on the securities regulatory agency’s ability to seek return to investors of wrongdoers’ ill-gotten gains.  The decision was not a complete victory for the SEC, however, since the Court also emphasized limitations on disgorgement that it suggested the SEC had exceeded with its past practices.

At issue was a remedy the SEC has long claimed the right to seek in civil enforcement actions: disgorgement of the defendant’s gains for return to injured investors.  The SEC in many fraud cases seeks both civil penalties, as authorized by statute, as well as disgorgement as an equitable remedy.  And courts generally permit that practice.

In light of certain recent Court rulings against the SEC on various issues and the Roberts court majority’s attitude toward administrative agencies generally, some securities practitioners anticipated a ruling in Liu that courts lacked the power to order disgorgement as a remedy in securities enforcement civil actions, upsetting years of prior judicial practice. However,  the Court’s June 22 decision in Liu affirmed the SEC’s right to seek disgorgement by an 8-1 vote, with only Justice Clarence Thomas dissenting.

The majority opinion by Justice Sonia Sotomayor did identify certain limits on disgorgement, which may constrain the SEC from seeking disgorgement as freely as it has in the past. The opinion also articulated those limits in a manner that leaves substantial room for argument over how they

Among the myriad quarantine pursuits undertaken by the work-from-home crowd, whistleblowing appears to be proving popular. Recent reports indicate that the SEC received more than 4,000 Tips, Complaints, and Referrals (“TCRs”) regarding possible corporate malfeasance between mid-March and mid-May.  As noted by Division of Enforcement Co-Director Steve Peikin in a recent speech, that represents an approximate 35% increase over the same period last year.  This surge in TCRs has resulted in the SEC initiating hundreds of new investigations of alleged misconduct in the contexts both of COVID-19 and many other traditional areas.  After already facing challenges from the coronavirus pandemic, many employers may be surprised by this new COVID-19 side-effect.

Under the SEC’s Whistleblower Program, individuals who report TCRs containing high-quality original information that results in financial relief exceeding $1 million may be eligible for monetary awards ranging from 10% to 30% of that relief.  Since the Program’s inception, tips have resulted in more than $2 billion in financial relief, and more than $500 million in related whistleblower awards.  These figures include the recent record award of nearly $50 million to a single whistleblower on June 4, 2020.  Some have attributed the surge in TCRs to a combination of increasingly rich award sums, potential TCR filers’ being emboldened by their remote work environments and/or harboring increasing frustration over their job or financial situations, and enmity by furloughed or terminated employees.

Regardless of its cause, the increase in TCRs means that issuers and regulated entities should evaluate their

We understand that several issuers and regulated entities that publicly disclosed their receipt of funds from the SBA’s Paycheck Protection Program (PPP), established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, have received requests for information from the SEC’s Division of Enforcement. In general, the requested information appears to concern the recipients’ eligibility and need for PPP funds, the financial impact on recipients of the pandemic and government response, and recipients’ assessment of their viability and access to funding.

This SEC outreach is rumored to be part of a sweep styled In the Matter of Certain Paycheck Protection Program Loan Recipients. The SEC is reportedly investigating whether certain recipients’ excessively positive or insufficiently negative statements in recent 10-Qs may have been inconsistent with certifications made in PPP applications regarding the necessity of funding. These information requests are voluntary at this time, and it appears that not all PPP loan recipients are receiving document requests. There may be a correlation between large funding amounts and SEC scrutiny, both in terms of attracting interest and avoiding the impact of the SBA’s announced safe harbor for loans less than $2 million (though the safe harbor does not explicitly affect the SEC). Recent news reports indicate that the Department of Justice  Fraud Section also is investigating possible misconduct by PPP loan applicants. Initial DOJ actions have focused on potential overstatement of payroll costs and/or employee headcount, as well as misuse of PPP proceeds.  While existing allegations appear focused on extreme behavior, as