Document ID: ./input/supremecourt_opinions/opinions/19pdf/18-1501_8n5a.pdf
Page Number: 22

Cite as:  591 U. S. ____ (2020) 

19 

Opinion of the Court 

both the receipts and payments are taken into the account.” 
Goodyear, 9 Wall., at 804; see also Restatement (Third) §51,
Comment h, at 216 (reciting the general rule that a defend-
ant is entitled to a deduction for all marginal costs incurred
in  producing  the  revenues  that  are  subject  to  disgorge-
ment).  Accordingly,  courts  must  deduct  legitimate  ex-
penses  before  ordering  disgorgement  under  §78u(d)(5).    A 
rule to the contrary that “make[s] no allowance for the cost
and  expense  of  conducting  [a]  business”  would  be  “incon-
sistent with the ordinary principles and practice of courts
of chancery.”  Tilghman, 125 U. S., at 145–146; cf. SEC v. 
Brown, 658 F. 3d 858, 861 (CA8 2011) (declining to deduct 
even legitimate expenses like payments to innocent third-
party employees and vendors). 

The District Court below declined to deduct expenses on 
the theory that they were incurred for the purposes of fur-
thering an entirely fraudulent scheme.  It is true that when 
the “entire profit of a business or undertaking” results from
the wrongdoing, a defendant may be denied “inequitable de-
ductions” such as for personal services.  Root, 105 U. S., at 
203.  But that exception requires ascertaining whether ex-
penses are legitimate or whether they are merely wrongful 
gains “under another name.”  Goodyear, 9 Wall., at 803.  Do-
ing so will ensure that any disgorgement award falls within 
the  limits  of  equity  practice  while  preventing  defendants
from  profiting  from  their  own  wrong.  Root,  105  U. S.,  at 
207. 

Although  it  is  not  necessary  to  set  forth  more  guidance
addressing the various circumstances where a defendant’s 
expenses might be considered wholly fraudulent, it suffices
to note that some expenses from petitioners’ scheme went 
toward  lease  payments  and  cancer-treatment  equipment.
Such  items  arguably  have  value  independent  of  fueling  a 
fraudulent scheme.  We leave it to the lower court to exam-
ine  whether  including  those  expenses  in  a  profits-based