O’Melveny Worldwide

The Recorder: Legitimate Expenses or Ill-Gotten Gains? How the SEC’s Revamped Disgorgement Remedy is Playing Out

August 16, 2021

O’Melveny counsel Jorge deNeve and Michael Simeone and associate David Cohen contributed an article to The Recorder that considers how courts will determine the legitimacy of business expenses for SEC enforcement and the resulting impact on litigation strategies following the passage of the National Defense Authorization Act, legislation that expressly reaffirmed the SEC’s ability to obtain disgorgement.

The article poses the need for clarity on what constitutes a legitimate expense, the importance of an expenditure record, and its direct correlation to a specific business activity, while acknowledging the SEC’s view that the disgorgement analysis is “arguably unduly favorable” to the defendants in cases where administrative fees, construction, equipment, and rent are all queried.

“In limiting disgorgement to ‘net profits,’ the Supreme Court held that courts must deduct ‘legitimate expenses’ from any disgorgement amount,” the authors observed, adding that “[a]t the same time, the court noted that ‘expenses’ may be ‘wrongful gains under another name.’ This distinction has opened a battleground over what expenses courts should and should not consider legitimate.” 

The Recorder subscribers can read the full article here.