The U.S. Supreme Court is set to resolve a critical circuit split over whether the Securities and Exchange Commission ("SEC") must prove that investors were actually harmed to force wrongdoers to disgorge ill-gotten gains.
The issue comes to the Supreme Court through a petition from Ongkaruck Sripetch, who is challenging a $2.2 million disgorgement order from the Ninth Circuit related to a $6 million pump-and-dump scheme. Sripetch argues that the conflicting lower court rulings have created "intolerable confusion" for when the agency can seek disgorgement.
The circuit split was created in the wake of the Supreme Court's 2020 decision in Liu v. SEC , in which the Court ruled that the SEC is permitted to seek disgorgement for victims as long as the amount awarded does not exceed a wrongdoer's net profits. Thereafter, the First Circuit upheld a $22.7 million disgorgement order against an investment adviser who was found to have defrauded his clients, breaking from the Second Circuit, which in 2023 ruled that the SEC must prove harm in order to secure disgorgement.
While the SEC acknowledged the circuit split, it urged the Court to uphold the Ninth Circuit's ruling, arguing that Liu does not require a finding of pecuniary harm for disgorgement orders to stand.
The Court's decision will have nationwide implications, clarifying the future of SEC enforcement leverage, settlement dynamics, and litigation strategy in connection with fraud related claims brought by the agency. It will ultimately determine whether disgorgement is a tool to compensate victims or a broader penalty based on a wrongdoer's profits, regardless of investor harm. Accordingly, practitioners should continue to monitor future developments in this area.
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