Sean Hullihan
93 Geo. Wash. L. Rev. 445
Disgorgement has been a powerful tool for the Securities and Exchange Commission (“SEC”) to recover billions in ill-gotten gains from securities fraud defendants. In a series of recent cases culminating in Liu v. SEC, the Supreme Court affirmed the SEC’s ability to pursue disgorgement but limited the remedy to a defendant’s net profits. Confusingly, the Court also mentioned a potential exception to the net profit limitation for “wholly fraudulent” schemes, in which deductions are denied for expenses connected entirely to the perpetration of the fraud. Congress later expressly authorized the SEC to pursue disgorgement in civil cases, raising the question of whether the equitable limits from Liu still apply to the new authority. In response, courts have offered competing analyses of what may be deducted when calculating the defendant’s liability.
This Note proposes using tax law’s constructive dividend rule to clarify the “wholly fraudulent” scheme exception. A constructive dividend is when a claimed business expense is legally recognized as a taxable distribution of income, on the grounds that the expenditure only conferred a benefit to the recipient, not the business. Both constructive dividend and disgorgement cases require a focus on substance over form to determine who benefitted from a given transaction. While tax law and securities law have separate purposes, the constructive dividend doctrine offers clarity for a challenging analytical problem.
