A Unanimous Supreme Court Upholds SEC Disgorgement Powers

In a unanimous opinion, the United States Supreme Court resolved a circuit split and ruled that the US Securities and Exchange Commission (SEC or Commission) may continue collecting the ill-gotten gains of alleged violators of the securities laws without first having to identify victims who suffered a pecuniary harm. This decision constitutes a rare recent win for the SEC before the Court, where the Commission has been met with several defeats including prior decisions that narrowed the SEC’s ability to collect disgorgement.

In 2017, the Court held that SEC disgorgement is a “penalty” under 28 USC § 2462 and therefore subject to the statute’s five-year limitations period.[1] In 2020, the Court ruled that a disgorgement award cannot exceed a wrongdoer’s net profits and must be awarded for victims.[2] And in June 2024 the Court held that, where the SEC seeks civil penalties against a defendant for securities law violations, the Seventh Amendment entitles the defendant to a jury trial.[3] That same month, the Court held that administrative agencies, including the SEC, do not get “deference” for their interpretations of terms in ambiguous statutes.[4]

The Court’s latest opinion[5] protects the SEC’s ability to continue pursuing disgorgement—a vital part of its enforcement program—while leaving open several questions about the limits of the SEC’s powers going forward. 

SEC’S CHARGING OF SRIPETCH

According to the SEC, Ongkaruck Sripetch was involved in fraudulent schemes involving at least 20 penny-stock companies. These schemes included the well-recognized market manipulation scheme known as a “pump and dump.” The SEC charged Sripetch with six counts of securities fraud and one count of selling unregistered securities. Sripetch consented to the entry of judgment against him and agreed to the court ordering disgorgement.

When the SEC proceeded to seek more than $4.1 million in disgorgement, however, Sripetch objected. He argued that the SEC’s request violated the Court’s prior holding in Liu v. SEC, wherein the Court held that SEC disgorgement can constitute “equitable relief” so long as it adheres to traditional equitable rules, including that a disgorgement award does not exceed a wrongdoer’s net profits and is awarded for victims.[6]

According to Sripetch, the SEC lacked evidence that his schemes caused investors to suffer any financial losses—an element he argued was necessary before disgorgement could be awarded under Liu.

Sripetch thus argued that he should not have to pay disgorgement even if his scheme resulted in him earning over $4.1 million. The Ninth Circuit rejected Sripetch’s argument, deepening a split among the Courts of Appeals. While the Ninth Circuit joined the First Circuit in holding that the SEC may obtain disgorgement without proving investors have suffered pecuniary loss, the Second Circuit had taken the opposite view.[7] This split paved the way for the Court to step in and resolve this dispute. 

THE OPINION

Justice Gorsuch wrote the opinion for a unanimous Court. The Court analyzed 15 USC §§ 78u(d)(5) and 78u(d)(7). Section 78u(d)(5) allows the SEC to obtain “any equitable relief that may be appropriate or necessary for the benefit of investors,” and Section 78u(d)(7)—adopted after the Court’s decision in Liu—expressly allows the SEC to seek disgorgement in enforcement proceedings.

As noted, the Court in Liu had established that SEC disgorgement can constitute “equitable relief” under the statute so long as it adheres to traditional equitable rules, including that a disgorgement award does not exceed a wrongdoer’s net profits and is awarded for victims.[8] Sripetch argued that traditional equitable rules require the SEC to prove investors suffered pecuniary losses before it is entitled to disgorgement.

The Court rejected Sripetch’s arguments, stating that, while Liu required disgorgement be “awarded for victims,” this does not mean there must be victims who suffered pecuniary losses or that the SEC is required to make that showing.[9] The Court’s opinion continued that, under traditional equitable principles, a victim seeking disgorgement of a defendant’s unlawful gains does not have to prove they had suffered a corresponding loss.[10]

According to the Court, the point of disgorgement is not to compensate a victim for a financial loss but rather for the defendant “to give to the plaintiff the amount which he has been enriched from the wrongful invasion of the plaintiff’s legally protected interests”[11]: “[w]hatever else traditional equitable principles demand, they do not require a showing of pecuniary loss before a court may issue an award of unjust profits.”[12]

Moreover, the Court noted there may be situations where a defendant can unjustly enrich himself without leaving a plaintiff worse off, and in those instances a court must choose to “either restore the defendant to his prior position by stripping him of his unjust gains, or it can allow the defendant to benefit.”[13] The Court reasoned that equity prefers not to let the defendant keep his ill-gotten profits.[14]

Despite the unanimous victory, the SEC continues to face significant limits to its disgorgement powers. Disgorgement may not be used as a penalty.[15] Justice Gorsuch wrote that “[s]hould the government seek to depart from traditional equitable principles and attempt to use §78u(d)(7) to secure penalties, it would of course proceed beyond what Liu held §78u(d)(5) tolerates.”[16] 

The Court’s decision left several questions unresolved. First, it remains unclear whether the SEC can still seek disgorgement when it is infeasible to distribute the collected funds to investors. Second, it is still unclear how the SEC can meet its burden of showing infeasibility of returning funds to investors.

Finally, the Court declined to decide whether the SEC is correct in its position that under Section 78u(d)(7) it does not have to connect the unlawful profits it seeks to any specific victims. In other words the SEC argued that, since the enactment of Section 78u(d)(7), it may resume its former practice of transferring disgorgement awards to the Treasury without first trying to return funds to investors.[17]

In a concurring opinion, Justice Thomas suggested the Court should recognize in a future case that disgorgement is now a legal remedy for which the Seventh Amendment requires a jury trial.[18] Justice Thomas contends that Congress’s post-Liu amendment to the Exchange Act in Section 78u(d)(7) transformed SEC disgorgement into a legal remedy.[19]

Thomas views the statutory structure—expressly authorizing “disgorgement,” creating separate limitations periods for “disgorgement” and “any equitable remedy”—as evidence that Congress separated disgorgement from equitable relief and made it a distinct legal remedy.[20]

Thomas’s concurrence would mark an extension of the Court’s previous 2024 decision in Jarkesy which had held that, where the SEC seeks penalties based on alleged violations of the securities laws that in turn are based on common law claims, a defendant is entitled to have their case heard by a jury as opposed to proceeding in front of an administrative law judge.

If courts adopt this reasoning, this will further limit the SEC’s ability to bring cases in the administrative proceeding, albeit this would have little practical effect at the moment as the SEC brings most litigated cases in federal court post-Jarkesy.

KEY TAKEAWAYS

The SEC may continue to obtain disgorgement in a variety of cases, including those where it cannot show any specific pecuniary harm to investors. In 2024, the SEC obtained orders to disgorge $6.1 billion, yet it returned only $345 million to victims that year (it often takes time to distribute funds to investors, so it is not surprising that the amount of disgorgement obtained exceeded funds distributed).

Despite concerns raised in amicus briefs that the SEC could use a favorable ruling in the case in a way that exceeds what is permissible under Liu, the Court refused to further limit the SEC’s ability to obtain disgorgement. 

Accordingly, disgorgement will remain one of the SEC’s most powerful tools for recovering funds from “wrongdoers” even before it has identified impacted investors. Numerous questions remain unresolved, but for now the SEC can count this case among its rare recent wins at the Supreme Court.