Supreme Court Allows SEC to Obtain Disgorgement Without Showing Investors Suffered A Financial Loss

Sripetch v. SEC, No. 25-466

Introduction

Today, the Supreme Court unanimously held that the SEC is not required to show that investors suffered pecuniary loss in order to obtain a disgorgement award. But the Court left open for resolution in future cases other potential limitations on the SEC’s disgorgement authority.

Background

This case is the Supreme Court’s latest decision regarding the SEC’s authority to seek disgorgement in its enforcement proceedings, following the Court’s 2020 decision in Liu v. SEC,591 U.S. 71 (2020). The Court concluded in Liu that the SEC’s authority to seek “any equitable relief that may be appropriate or necessary for the benefit of investors,” 15 U.S.C. § 78u(d)(5), encompassed the authority to seek disgorgement—but that the SEC’s disgorgement authority was limited by the bounds of traditional equity practice. Congress then expressly authorized the SEC to seek disgorgement under 15 U.S.C. § 78u(d)(7).

In this case, the SEC brought a civil enforcement action against Ongkaruck Sripetch, alleging securities fraud and sale of unregistered securities. Sripetch consented to entry of judgment against him, but objected when the SEC sought more than $4.1 million in disgorgement. He argued that, under Liu, disgorgement can only be awarded for “victims” and said that there were no victims in his case because there was no evidence that investors had suffered financial losses from his conduct. The district court held that the SEC had shown pecuniary loss and upheld the disgorgement award on that basis. On appeal, the Ninth Circuit rejected the argument that a showing of pecuniary harm was necessary in the first place, agreeing with the First Circuit and disagreeing with the Second Circuit.

Issue

Whether the SEC may seek equitable disgorgement under 15 U.S.C. § 78u(d)(5) and (d)(7) without showing that investors suffered pecuniary harm.

Court’s Holding

In a unanimous opinion authored by Justice Gorsuch, the Supreme Court affirmed the Ninth Circuit’s ruling and held that the government may seek disgorgement under 15 § U.S.C. 78u(d)(5) and (d)(7) without proof of pecuniary loss.

The Court began by examining the text of the relevant statutes. Section 78u(d)(5) refers generally to “equitable relief,” and Liu held that this language allowed disgorgement “so long as the remedy adheres to traditional equitable principles”—including the principle that disgorgement must be for “victims.” Section 78u(d)(7), added after Liu, expressly allows disgorgement. The Court “assume[d] without deciding” that disgorgement under Section 78u(d)(7) “remains an equitable remedy,” such that it “must comply with traditional equitable rules, including the rule that disgorgement must be awarded for victims.” Even on that understanding, the Court held, “a showing of pecuniary loss is not required before an investor may qualify as a victim of an offender’s wrongdoing entitled to compensation.”

The Court explained that disgorgement historically has been measured by the amount of a defendant’s gain from wrongdoing, rather than the amount of a plaintiff’s loss. The Court surveyed a number of previous cases in which, “[a]pplying traditional equitable principles, a court ordered the defendant to disgorge the value of the gain attributable to his invasion of the plaintiff’s legally protected interests without requiring a showing of pecuniary loss.” The Court concluded that these cases demonstrated that equity historically preferred to “restore the defendant to his prior position by stripping him of his unjust gains,” rather than “allow the defendant to benefit from his misconduct because the plaintiff’s financial position has not changed.”

The Court rejected the argument that its holding was inconsistent with Liu’s requirement that disgorgement be “awarded for victims.” It explained that the historical cases show that a person may qualify as a victim without a showing of pecuniary loss and that restoring the status quo can involve depriving a defendant of his unjust gains even if the victims suffered no loss.

The Court recognized that, if the government sought penalties to be deposited into the Treasury rather than compensation for victims, that could represent a departure from traditional equitable principles not authorized by Section 78u(d)(5). The Court ultimately declined to resolve whether Section 78u(d)(7) would allow the SEC to pursue disgorgement in that situation and whether, if so, it might trigger the Seventh Amendment right to a jury. And it further declined to address an argument raised by amici that disgorgement is only appropriate where a defendant has violated a victim’s legally protected rights, noting that Sripetch had not disputed that his victims suffered a violation of their legally protected interests.

The Court’s decision thus rejects proof of a pecuniary loss as a prerequisite for the SEC’s ability to obtain disgorgement awards, but leaves open, for resolution in future cases, other potential limitations on the SEC’s authority to seek such remedies.

Justice Thomas authored a concurring opinion, taking the view that when the SEC seeks disgorgement, it is a legal remedy subject to the Seventh Amendment jury right.

Read the opinion here.