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Although the Supreme Court’s decision in Liu v. SEC does not expressly address disgorgement against relief defendants, the opinion has significant implications for how such disgorgement may be challenged. Relief defendants, also known as nominal defendants, are typically third parties who are not accused of wrongdoing but are alleged to possess property traceable to a defendant’s unlawful conduct. Historically, courts have permitted the SEC and other federal agencies to seek disgorgement from such parties under equitable principles. After Liu, however, relief defendants have found new avenues to contest whether disgorgement orders imposed against them remain within the bounds of equity.

Using Liu to Challenge Disgorgement Calculations

One of the most immediate ways relief defendants have relied on Liu is by challenging disgorgement orders that fail to deduct legitimate business expenses. The Liu Court emphasized that equitable disgorgement should generally reflect net profits rather than gross receipts. As a result, relief defendants now argue that disgorgement awards that do not account for legitimate expenses improperly inflate the amount subject to disgorgement and cross the line from restitution into punishment. Courts that previously imposed disgorgement without carefully deducting such expenses may now face stronger challenges grounded in Liu’s equitable framework.

Net Profits and the Treatment of Innocent Investors

Beyond expense deductions, Liu has strengthened arguments for innocent investors who become relief defendants. In some cases, courts have ordered unwitting investors in fraudulent schemes to disgorge not only profits but also amounts representing a return of their initial investment. These decisions were often justified on fairness grounds, particularly where allowing some investors to retain their returns would leave other victims uncompensated. After Liu, relief defendants may argue that any disgorgement award exceeding their net profits is punitive and therefore improper, even if the result leaves disparities among victims. Under this reasoning, equity does not permit imposing a punitive remedy on one innocent party simply to offset losses suffered by others.

Questioning Whether Disgorgement Is Appropriate at All

The equitable principles underlying Liu may also support broader challenges to relief-defendant disgorgement. The opinion repeatedly emphasizes that disgorgement must be consistent with traditional equity and must not function as a penalty. Relief defendants may therefore argue that disgorgement is inappropriate altogether when the third party is merely a passive recipient of funds or property and did not act in concert with the alleged wrongdoer. In such cases, forcing disgorgement may resemble punishment rather than restitution, particularly where the relief defendant did not participate in or benefit knowingly from the unlawful conduct.

The Tension Highlighted by SEC v. Forex Asset Management

This tension is particularly evident in cases such as SEC v. Forex Asset Management LLC, where the Fifth Circuit required innocent investors to disgorge both their initial investments and profits directly traceable to those investments. Relief defendants now argue that such outcomes conflict with Liu’s suggestion that equitable disgorgement is unavailable where a defendant is merely a passive recipient of profits rather than a partner in wrongdoing. Going forward, relief defendants are likely to contend that disgorgement against third parties should require a showing that the third party acted in concert with the wrongdoer or otherwise engaged in culpable conduct.

Culpability and the Limits of Equitable Disgorgement

More broadly, Liu provides support for the argument that third-party disgorgement becomes punitive whenever the relief defendant cannot be characterized as a trustee, agent, or depository for the wrongdoer’s ill-gotten gains. The opinion authorizes equitable disgorgement only when assessed against culpable actors, which places pressure on courts to justify disgorgement against parties who are not accused of wrongdoing. As the relationship between the relief defendant and the wrongdoer becomes more attenuated, the equitable basis for disgorgement becomes increasingly difficult to sustain under Liu’s reasoning.

Gifts and Attenuated Relationships After Liu

Cases involving gifts derived from illegal proceeds present especially difficult questions after Liu. In SEC v. George, for example, the SEC obtained disgorgement of an engagement ring purchased with profits from an illegal scheme and gifted to the wrongdoer’s fiancée. There was no evidence that the fiancée acted as a trustee or agent for the wrongdoer. Under Liu, relief defendants in similar circumstances may argue that they do not stand in the shoes of the wrongdoer and that disgorgement imposed on them exceeds equitable limits, even where they provided no consideration for the property.

The Future of Relief-Defendant Disgorgement

Whether lower courts will adopt these arguments remains uncertain. Nonetheless, Liu has clearly expanded the range of tools available to relief defendants seeking to challenge disgorgement. Courts and enforcement agencies will likely continue to grapple with how to apply Liu’s equitable constraints in cases involving third parties, particularly where the relief defendant’s connection to the wrongdoing is indirect or passive. In the years ahead, Liu is poised to play a central role in reshaping the doctrine of relief-defendant disgorgement and defining the outer boundaries of equitable enforcement remedies.