First Circuit Limited SEC Disgorgement Awards in Commonwealth Equity Case

In April 2025, the US Court of Appeals for the First Circuit vacated a $93 million judgment against Commonwealth Equity Services, LLC, finding that questions of materiality in securities cases generally should be decided by juries rather than resolved at summary judgment.

Holland & Knight’s Second Opinion Blog reports that the case, SEC v. Commonwealth Equity Services, LLC, also addressed significant issues regarding the scope and calculation of disgorgement in SEC enforcement actions.

Following remand, the litigation was stayed while the parties pursued settlement discussions.

Commonwealth, an SEC-registered broker-dealer and investment adviser, disclosed in its Form ADV that it had a revenue-sharing arrangement with its clearing broker beginning in 2014.

The SEC alleged that between 2014 and 2018, Commonwealth inadequately disclosed conflicts of interest by failing to state that the arrangement incentivized steering clients toward certain mutual fund share classes over potentially less expensive alternatives.

The district court granted summary judgment to the SEC, concluding the omissions were material as a matter of law, and ordered Commonwealth to pay $93 million in disgorgement, interest, and penalties.

Commonwealth Equity appealed, arguing that a jury should have determined materiality.

The First Circuit rejected the district court’s per se approach to conflicts of interest, holding that materiality involves fact-specific inquiries best resolved by a jury unless no reasonable minds could differ.

The court emphasized the sophistication of the Commonwealth’s advisory representatives and their ability to make independent investment decisions, creating factual disputes about the significance of the alleged omissions.

With respect to disgorgement, the court found that the SEC failed to establish a sufficient causal link between the alleged violations and Commonwealth’s profits, improperly omitted deductions for legitimate expenses, and relied on flawed expert analysis.

The decision sets limits on the SEC’s disgorgement authority and reinforces the jury’s role in evaluating materiality in securities cases.

Attorneys should closely examine the factual context of disclosures, particularly where intermediaries play a role, and be prepared to challenge revenue-related remedies lacking direct causation evidence or proper expense deductions.

The ruling offers a framework for contesting both liability and financial remedies in future SEC enforcement actions.