The SEC’s disgorgement request in a litigated proceeding in federal district court is being challenged in the wake of the Supreme Court’s 2020 decision in Liu v. SEC, which limited how much the agency can seek in disgorgement.
In April 2015, the SEC filed a complaint in the U.S. District Court for the Northern District of Texas against two California oil-and-gas companies, Team Resources, Inc., and Fossil Energy Corporation, their common principal, and four sales associates (collectively, “Team Resources”) for allegedly operating a fraudulent oil and gas production scheme. The SEC charged that Team Resources lured investors to the oil companies by touting unreasonable oil and gas production figures and distributing misleading information regarding the companies’ operations.
To settle the charges, the Team Resources defendants consented to judgement permanently enjoining them from future violations of the securities laws and ordering them to disgorge their ill-gotten gains in amounts to be determined by the court. In 2019, after years of litigation over the SEC’s disgorgement request, the Fifth Circuit affirmed the district court’s disgorgement award of approximately $15.5 million. Team Resources then filed a petition for writ of certiorari to the United Statement Supreme Court contesting the award.
In June 2020, while Team Resources’s cert petition was pending, the Supreme Court issued its landmark decision in Lui v. SEC, holding that the SEC may seek disgorgement for violations of federal securities laws that “does not exceed a wrongdoer’s net profits and is awarded for victims.” Liu further held that lower courts must “deduct legitimate expenses before ordering disgorgement [under 15 U.S.C. § 78u(d)(5).” Following its decision in Liu, the Court reversed the Fifth Circuit’s decision in Team Resources, and the case was sent back to the district court with instructions to apply the principles of Liu to the facts of Team Resources.
Following remand, Team Resources urged the district court to hold an evidentiary hearing to determine the amount of legitimate expenses for purposes of disgorgement. The defendants argued in a recent filing that the SEC’s determination of its net profits “cannot possibly be anything other than the SEC’s uninformed guess” because the agency never inquired about their business expenses during the investigation. The SEC denies that an evidentiary hearing is necessary and asked the court to approve a disgorgement award of $2.4 million, which purportedly approximates Team Resources’s ill-gotten gains, less deductible expenses. The district court has yet to decide whether to grant Team Resources’s request for an evidentiary hearing.
While the litigation between Team Resources and the SEC may see more twists and turns, this is a case worth watching. Liu was a clear signal that SEC’s disgorgement claims—and the calculation of them—will face additional scrutiny by defendants and the courts. But the case also left unanswered many important questions, including what qualifies as a “legitimate” business expense for purposes of calculating disgorgement awards, what evidence a defendant may introduce to support such expenses, and whether defendants are entitled to an evidentiary hearing to challenge the SEC’s accounting. The Northern District of Texas may be the first federal court to address some of those important questions.