By Rodney F. Tonkovic, J.D.
Team Resources is back before the Supreme Court with a petition asking about the propriety of granting disgorgement without an evidentiary hearing. The case has been tossed in the wake of two other Court decisions affecting disgorgement, including an earlier petition that was remanded in light of Liu. But now, the petitioners are back with a new wrinkle: Can a federal court grant disgorgement without granting the defendant's request for a live evidentiary hearing? (Team Resources Incorporated v. SEC, May 1, 2023).
Back and forth. In 2015, the SEC brought an enforcement action against Team Resources, Inc. The defendants settled immediately, and the Commission moved for final judgment, asking for disgorgement reflecting the alleged gross pecuniary gain. While the SEC's motion was pending, the Supreme Court handed down its decision in Kokesh v. SEC .
Team Resources then argued that post-Kokesh, district courts no longer have authority to order disgorgement in SEC proceedings, but the court granted the requested disgorgement. The Fifth Circuit affirmed, stating that since Kokesh expressly declined to address the issue of whether disgorgement is an equitable remedy, Fifth Circuit precedent upholding the authority of the district courts to order disgorgement controlled.
After Kokesh was decided, Team Resources petitioned the Supreme Court asking if the SEC could still obtain disgorgement as an equitable remedy. Liu then upheld the SEC's ability to seek disgorgement in civil proceedings as a form of equitable relief, so long as the award is limited to the net profits of the wrongdoer and funds go to victims. Soon afterwards, Team Resource's petition was granted, vacated and remanded for further lower court proceedings consistent with Liu.
And back again. On remand, the Commission filed a renewed motion for remedies that reduced its calculation of disgorgement after deducting legitimate business expenses. Team Resources said that the SEC's calculations were flawed and argued that, under Liu, a live evidentiary hearing was necessary to properly calculate disgorgement. The district court denied this request, reasoning that Team Resources waived any right to a hearing in the settlement agreements and noting that Team Resources did not provide any documentary evidence in opposition. Team Resources also objected to the civil penalty, but the court said that this was outside of the scope of its mandate on remand.
On appeal, Team Resources argued that the district court erred in denying a live evidentiary hearing. The panel disagreed, because Team Resources agreed in the settlement that the district court could calculate disgorgement and penalties on the basis of the papers alone. The panel noted as well that the FRCP allows district courts to decide motions on briefs and without oral hearings. The panel did not address Team Resource's objections to the civil penalty because the arguments on that issue were not raised before the district court.
The petition. Team Resources asserts that Liu left open the question of whether the SEC may obtain disgorgement without an evidentiary hearing. The decision not to grant a hearing, the petition says, runs afoul of Liu's mandate that testing the legitimacy of claimed business expenses requires ascertaining whether they are legitimate or are wrongful gains, meaning that an evidentiary hearing must be held to resolve conflicting arguments. The petition posits that the Rules of Civil Procedure and minimum due process guarantees also require an evidentiary hearing.
Team Resources also maintains that they did not waive their right to an evidentiary hearing. The petition bases its argument on the Fourth Circuit's decision in U.S. v. Bank, which held that disgorgement order is not a criminal penalty for the purposes of double jeopardy. When Team Resources entered into the consent judgments, neither Kokesh nor Liu had been decided, and what the waiver represented at the time has changed after the issue of those two opinions. Plus, no court has examined the voluminous records in this case to determine the precise amount of disgorgement in light of the Court's holdings: the SEC only offered an "approximation," the petition says.
Finally, the petition argues that the civil penalty imposed violates the Eight Amendment. The court imposed a penalty of almost $15.3 million against Kevin Boyles, Team Resource's owner—an amount roughly 6.5 times that of the $2.4 million disgorgement imposed. The petition argues that the Eighth Amendment argument did not ripen until the penalty was actually imposed. And, the penalty itself is grossly disproportional to the offense, particularly where, as here, the disgorgement amount is disputed. The district court and the Fifth Circuit did not even consider whether the penalty is excessive, the petition says.
Read the Docket. This case, and others before the Court may be referenced in the latest version of the Supreme Court Docket, a regular feature of Securities Regulation Daily. Issued opinions, granted petitions, pending petitions, and denied petitions are listed separately, along with a summary of the questions presented and the current status of each appeal.
The petition is No. 22-1073.