- within Cannabis & Hemp topic(s)
The U.S. Supreme Court has agreed to hear Sripetch v. SEC, which will resolve a split among circuits over whether the SEC must prove that investors suffered financial harm to seek disgorgement. The case stems from uncertainties left by the 2020 Liu decision and conflicting interpretations after Congress amended laws affecting disgorgement. Some courts say disgorgement doesn't require showing pecuniary harm, while others say it does. The Court's ruling could clarify whether the SEC can seek disgorgement without demonstrating investor loss, but may also raise broader questions about who qualifies as a victim, what constitutes harm, and whether the SEC can pursue disgorgement in non-fraud cases.
On Jan. 9, 2026, the U.S. Supreme Court granted certiorari in Sripetch v. Securities & Exchange Commission after both parties urged the High Court to hear the case, underscoring the importance of the issue to be considered. The Court will aim to resolve a circuit split over whether the Securities and Exchange Commission (SEC) must show that victims suffered pecuniary harm in order to obtain disgorgement in SEC enforcement actions.
The disagreement stems from differing interpretations of the Supreme Court's June 2020 decision in Liu v. Securities & Exchange Commission, 591 U.S. 71 (2020), which held that disgorgement must be "awarded for victims," without providing practical guidance as to how to apply this principle. This reticence has proven problematic because disgorgement is an oft-used hammer in the SEC's enforcement toolbelt, generating $6.1 billion in fiscal year 2024 as compared to $2.1 billion in civil penalties. See SEC Announces Enforcement Results for Fiscal Year 2024, Press Release, Sec. & Exch. Comm'n (Nov. 22, 2024). By taking this case, the Court is now poised to resolve the uncertainty that it left in Liu's wake. However, as discussed below, doing so may prove a taller task than answering the specific question before it.
Congress Deepens 'Liu's' Uncertainty
While the Supreme Court created some uncertainty in an 8-1 decision that straddled the court's ideological divide, it was at least clear in its intent to preserve, but narrow, the SEC's power to seek disgorgement. The lone dissenter was Justice Clarence Thomas, who argued that the SEC had no disgorgement power at all. The majority, after exploring the common law roots of disgorgement, held that the SEC may pursue disgorgement under 15 U.S.C. §78u(d)(5) so long as it "does not exceed a wrongdoer's net profits and is awarded for victims." 591 U.S. at 74 (emphasis added). However, the decision failed to define the term "victims," a shortcoming that lower courts would grapple with later.
But first, the legislative branch took an errant hack at defining the SEC's disgorgement powers. As the implications of Liu were still being unpacked, on Jan. 1, 2021, Congress passed the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (the NDAA). The NDAA effected two disgorgement-related statutory changes. First, it authorized the SEC to seek, and any federal court to order, disgorgement. See 15 U.S.C. §78u(d)(7). Second, it authorized the SEC to seek disgorgement to prevent unjust enrichment. 15 U.S.C. §78u(d)(3)(A)(ii). The law's proximity in time to Liu suggested it was a reaction to the decision, but, as written, it was unclear if the law restored the SEC's ability to seek disgorgement unconfined by Liu's limitations. Commentators and courts began wrestling with how to square the new law with Liu, and if Liu was still good law, how to interpret its requirement that disgorgement be "awarded for victims."
A Circuit Split Develops
In 2022, the Fifth Circuit was the first federal appellate court to take on these questions when it held in Securities & Exchange Commission v. Hallam that the NDAA restored a disgorgement framework untethered to Liu's equitable principles, including that disgorgement be awarded for victims. See 42 F.4th 316, 338 (5th Cir. 2022). In 2023, the Second Circuit joined the fray and explicitly disagreed with the Fifth Circuit, holding in Securities & Exchange Commission v. Govil that "both §78u(d)(5) and § 78u(d)(7) must comport with traditional equitable limitations as recognized in Liu." 86 F.4th 89, 98 (2d Cir. 2023). One year later, the First Circuit took a different tack than its sister circuits in Securities & Exchange Commission v. Navellier & Associates, Inc., 108 F.4th 19 (1st Cir. 2024), holding that Liu remained good law but did not require a showing of pecuniary harm as a predicate for disgorgement.
The court acknowledged that disgorgement must "do more than simply benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains." The court observed that while the clients in Navellier actually profited from their investments, they were still induced to pay advisory fees because of misrepresentations. The court then held that the SEC intended to distribute disgorged funds to them, which would "do more than simply benefit the public at large—it will remedy a direct harm" to the clients.
Enter Sripetch
As this circuit split developed, Securities & Exchange Commission v. Sripetch was working its way to resolution in California. In its complaint, the SEC alleged that Sripetch and others engaged in a "pump-and-dump" scheme that entailed creating the illusion of active market interest in a stock, secretly sponsoring promotional campaigns to drive up its price, then selling at a profit. Among other relief, the SEC sought disgorgement. Sripetch fought back, arguing that the SEC failed to provide evidence that any investors suffered harm. The district court's April 2024 decision held that it need not reach the question of whether the SEC was required to show pecuniary harm to obtain disgorgement because the SEC would have met that burden if it had been required to do so. The court reasoned that such harm was established by the fact that investors bought stock at prices inflated by defendants' misconduct. No. 20-cv-01864, 2024 WL 1546917 at *5 (S.D. Cal. Apr. 8, 2024).
On appeal, the Ninth Circuit held that it need not determine whether the SEC showed pecuniary harm because such a showing was not required in the first place. See Sec. & Exch. Comm'n v. Sripetch, 154 F.4th 980, 985 (9th Cir. 2025). The court held that while the presence of a victim was required for an award of disgorgement under Liu, that victim need not have suffered any loss whatsoever, let alone a pecuniary one. Rather, it introduced a new analytical construct into the disgorgement debate by holding that "[a]t common law, a claimant seeking disgorgement need only show 'an actionable interference by the defendant with the claimant's legally protected interests."
Notably, while the Ninth Circuit avoided ruling on whether the SEC had shown pecuniary harm, it noted that "the Commission's contention that the investors suffered pecuniary harm merely because they paid artificially inflated prices for securities is in tension with Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005)." 154 F.4th at 984 n.4. In Dura, the Supreme Court held that when there is a claim of fraud on the market, an "inflated purchase price will not itself constitute or proximately cause the relevant economic loss." Dura Pharms., 544 U.S. at 342. As discussed below, the Ninth Circuit's citation of Dura may further complicate the path to resolution.
The Threshold of Clarity?
The Supreme Court appears ready to resolve the question of whether the SEC may seek disgorgement under 15 U.S.C. 78u(d)(5) and (d)(7) without showing investors suffered pecuniary harm. However, creating a workable disgorgement regime may require answering several other questions along the way:
- Who are "victims" under Liu?
- What suffices to show pecuniary harm?
- Can the SEC establish pecuniary harm merely by showing that investors paid prices artificially inflated by a defendant's misconduct, or does the "tension" between this standard and the Supreme Court's decision in Dura, as observed by the Ninth Circuit in Sripetch, render it unworkable?
To further complicate matters, if the court holds that a showing of pecuniary harm is not required, more questions emerge:
- Is non-pecuniary harm required to obtain disgorgement?
- If so, is the Ninth Circuit correct that harm is properly characterized as an actionable interference by a defendant with an offended party's legally protected interests?
- If so, what constitutes a "legally protected interest" and "interference" with that interest?
Guidance by the Supreme Court on these questions could head off a "déjà vu all over again" scenario wherein the High Court speaks authoritatively but without precision, as it did in Liu.
Even if these questions are resolved, another will remain: What about cases that do not involve fraud? The SEC has made a practice of pursuing disgorgement in non-fraud enforcement actions, often where investors have reaped substantial profits and suffered no cognizable harm, such as those stemming from registration violations. Because Sripetch involves investor fraud, it is possible that the issue of whether and when the SEC can seek disgorgement in non-fraud contexts will remain unresolved.
Conclusion
Disgorgement is a critical enforcement tool for the SEC. It provides a mechanism for forfeiture of ill-gotten gains unlike civil penalties, which are calculated based on a mix of factors, including whether the alleged wrongdoer is an individual or entity, and the number and nature of violations at issue. The Supreme Court can bring much-needed clarity on the question of whether the SEC must show pecuniary harm to seek disgorgement in enforcement actions. However, in order to settle the disgorgement debate once and for all, it may have to go further and answer a broader range of questions regarding the viability of past precedent, the effect of legislation, and the interpretation of key principles central to the concept of disgorgement.
Originally published by New York Law Journal.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
