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E-MailJ.W. Verret, CPA/CFF, is an Associate Professor at George Mason University School of Law, is a practicing forensic accountant at Veritas Financial Analytics, and is Counsel at Lawrence Law LLC. This post is based on his recent paper.
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?
My new draft article, available here, provides securities attorneys a guide for working with forensic accountants to develop defensible disgorgement calculations as they negotiate with the SEC and as they litigate on behalf of clients. By synthesizing key precedents with fundamental accounting principles, it gives lawyers a conceptual framework for engaging forensic accounting experts after Liu.
This is the first article to systematically link the precedent and guidance available in the remedies treatises cited by the Supreme Court in Liu v. SEC and related lower court opinions expanding on Liu and to then link those concepts to fundamental accounting and finance principles.
The result is an article at the intersection of securities law and accounting that links those two literatures together to contribute to the law and accounting literature generally. This article further serves as a guide for the SEC and defendants in shaping the billions of dollars in disgorgement remedies that those parties negotiate every year.
Some key insights from the article:
- Liu requires linking securities law precedent to accounting concepts like revenue recognition, expense allocation, and netting principles in forensic accounting. This interdisciplinary approach provides a roadmap for calculating net profits.
- Cost accounting and regulatory accounting can serve to substitute for GAAP in disgorgement accounting net profit estimates
- Key issues include determining which revenues and expenses to include, allocating joint profits among multiple defendants, considering tax effects, and applying GAAP vs. other standards.
- Securities lawyers should work closely with forensic accountants to build methodologies that withstand scrutiny, using the article’s framework.
- Mastering the interplay between legal standards and accounting methodology leads to stronger negotiating positions with the SEC.
- An overview of the Liu decision and how it changes the leverage dynamics in SEC negotiations.
- Analysis of how remedies treatises cited in Liu link to accounting principles for calculating net profits.
- Discussion of specific accounting issues like revenue recognition, apportionment of expenses, and potential application of tax regulations.
- Examples demonstrating how forensic accounting can quantify net profits.
- Guidance for developing evidence-based methodologies that limit discretionary awards.
- Strategies for collaborating with forensic accountants to build stronger negotiating positions.
Any securities lawyers negotiating SEC disgorgement settlements should read this article. Liu fundamentally changes the accounting calculus underlying these awards. With disgorgement shifting to a battle of net profits calculations, forensic accounting expertise is now essential.
This article gives lawyers the conceptual foundation to collaborate effectively with accounting experts in quantifying net profits. This will strengthen disgorgement positions whether negotiating settlements or litigating awards in the new era ushered in by Liu.
The SEC still wields substantial leverage in many cases. But this article equips securities counsel with the right questions to ask and analytics to deploy in advocating for clients facing disgorgement claims. The synthesis of legal and accounting concepts provides a valuable new resource for practitioners operating in the space between law and accounting.
As disgorgement shifts from an art to a science after Liu, the article provides a valuable roadmap and toolbox for securities lawyers operating at the intersection of law and accounting. By leveraging forensic accounting expertise, attorneys can drive better outcomes for clients facing SEC disgorgement claims.
The disgorgement remedy is traditionally one of the more powerful tools in the SEC’s arsenal that the SEC has used to obtain billions in settlement awards every year. The overwhelming majority of cases brought by the SEC settle owing to the leverage the SEC has over enforcement targets.
The Liu v. SEC case changes the negotiating dynamics of settlement somewhat, in that the Liu case substantially curtails the SEC’s discretion and sets a ceiling on a disgorgement award to the net profits obtained. This will impact billions in annual awards and put forensic accounting questions front and center in these settlement negotiations and in any cases that ultimately proceed to trial.
The case also opens the door to some complex questions at the intersection of securities law and accounting. Or more precisely, complex questions at the intersection of securities law on the one hand and multiple fields of accounting, including financial accounting, forensic accounting, and possible tax and other regulatory accounting.
The Supreme Court’s brief reference to net profits opens up a host of questions about how to properly define net profits for this particular disgorgement purpose that will continue to be litigated and will require continued thought leadership by consulting accountants.
This paper has sketched a map of those initial legal and accounting questions and provides securities attorneys and the forensic accountants the tools to assist them with an initial compass to begin to navigate the many interpretive questions that naturally flow from Liu v. SEC.
