Disgorgement Accounting After Liu v. SEC in Securities Enforcement Cases

From the Harvard Law School Forum on Corporate Governance - The Supreme Court’s landmark Liu v. SEC ruling curtails the SEC’s discretion in disgorgement remedies, limiting awards to a defendant’s “net profits” from wrongdoing. This shifts billions in settlement negotiations. But how should securities lawyers calculate these “net profits” in the wake of Liu? https://corpgov.law.harvard.edu/2023/08/30/disgorgement-accounting-after-liu-v-sec-in-securities-enforcement-cases/

Rogue Trader Settles Enforcement Action, Criminal Charges Pending

The SEC filed charges against  Keith A. Wakefield, a former managing director and head of fixed-income trading at IFS Securities, Inc., an Atlanta-based broker-dealer, causing millions of dollars of losses through unauthorized trading in fixed income securities, and with fraudulently obtaining approximately $820,000 in fictitious commission income.

According to the SEC's complaint, the trader has settled the case, which alleged that from June through August 2019, Wakefield engaged in unauthorized speculative trading in U.S. Treasury securities, on behalf of IFS and incurred millions of dollars in losses for the firm. The complaint further alleges that Wakefield engaged in a variety of fraudulent practices to create the appearance of fictitious trading profits and disguise his unauthorized trading losses, including falsifying IFS’s books and records. As alleged, from January 2017 through August 2019, Wakefield also fraudulently obtained approximately $820,000 in commission income from IFS based on fictitious commission payments from customers that he fabricated and recorded on IFS’s books and records. According to the complaint, Wakefield’s fraud came to an end in August 2019 when IFS was unable to honor millions of dollars in unauthorized fixed income securities trades executed by Wakefield with more than one dozen counter-parties. As a result, IFS was forced to close its business, withdraw its registration as a broker-dealer, and file for bankruptcy.

The SEC’s complaint charges Wakefield with violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, and with aiding and abetting IFS’s failure to maintain accurate books and records and operate with sufficient net capital. Wakefield has agreed to settle the SEC’s charges by consenting to a permanent injunction and to pay disgorgement plus prejudgment interest and a civil penalty in amounts to be determined by the court at a later date. The settlement is subject to court approval.

In a parallel action, the U.S. Attorney’s Office for the Northern District of Illinois today announced criminal charges against Wakefield for related misconduct.

Read the Full Press Release

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The End of Disgorgement?

The Supreme Court granted certiorari in a case that may well have a very significant impact on the remedies available in Commission enforcement actions: Liu v. Securities and Exchange Commission, No. 18-1501 (Cert. granted Nov. 1, 2019). 

The question the Court agreed to resolve is: “Whether the Securities and Exchange Commission may seek and obtain disgorgement from a court as ‘equitable relief’ for a securities law violation even though this Court has determined that such disgorgement is a penalty.” The case will be heard later this term.

LexBlog has an excellent analysis - https://www.lexblog.com/2019/11/05/remedies-in-sec-enforcement-actions-the-end-of-disgorgement/