A Cause for Concern: The Need for Proximate Cause in SEC Enforcement Actions and How the Third Circuit Got It Wrong in SEC v. Teo

Abstract

On February 10, 2014, in SEC v. Teo, the U.S. Court of Appeals for the Third Circuit held that, in an action for disgorgement of profits under the Securities Exchange Act of 1934, the Securities Exchange Commission (SEC) does not have the burden of proving proximate cause. The court reasoned that the SEC must only prove but-for causation between alleged wrongdoing and ill-gotten profits. This Comment argues that, going forward, the Third Circuit should reject Teo and apply a proximate cause standard, especially regarding proceeds. Should the Supreme Court reach the issue in the future, it should similarly reject the Third Circuit’s reasoning in Teo. Courts should require the SEC to show a proximate link between the alleged securities violation and the profits to be disgorged in order to avoid turning the remedy into an impermissible penalty.