SEC disgorgement following Sripetch : The end of pecuniary loss – and the beginning of new battles

Sripetch is the third major Supreme Court decision in a decade to grapple with the scope of the SEC’s disgorgement power, following Kokesh v. SEC in 2017 and Liu v. SEC in 2020. With this trio of decisions, the Court has drawn boundaries around the SEC’s disgorgement powers, but several consequential questions remain unanswered.

Background 

From 2013 to 2017, Ongkaruck Sripetch engaged in fraudulent pump-and-dump schemes involving at least 20 penny-stock companies. Sripetch and his co-conspirators purchased shares of penny-stock companies, promoted the companies to others, and sold their shares after share prices rose.

The SEC brought a civil enforcement action against Sripetch, charging him with six counts of securities fraud and one count of selling unregistered securities. Sripetch consented to judgment and agreed that the court could order disgorgement. But when the SEC sought over US$4.1 million in disgorgement and prejudgment interest, Sripetch objected, arguing that the SEC lacked evidence that his conduct caused investors to suffer financial losses. The district court found that the SEC had shown pecuniary loss and ordered disgorgement. Sripetch appealed to the Ninth Circuit, which held that the SEC was not required to prove pecuniary loss to investors.

The Ninth Circuit’s decision deepened a circuit split that emerged following the Supreme Court’s 2020 decision in Liu v. SEC. In Liu, the Court held that disgorgement was an equitable remedy available to the SEC where it was “awarded for victims” and did not exceed a defendant’s net profits. Following Liu, Congress codified the SEC’s power to seek disgorgement in “any action or proceeding brought by the [SEC]” in 15 U.S.C. § 78u(d)(7). Circuit courts diverged in their interpretation of Liu’s “awarded for victims” language and whether it required the SEC to show that victims suffered financial loss. The Second Circuit found in SEC v. Govil that pecuniary loss was required, while the First Circuit took the opposite position in SEC v. Navellier & Associates, Inc. The Supreme Court took up Sripetch to resolve this dispute.

Holding and concurrence

In Sripetch, a unanimous Court sided with the First and Ninth Circuits to find that the SEC is not required to prove pecuniary loss to investors when seeking disgorgement. Without deciding whether Congress’s addition of § 78u(d)(7) altered the nature of the SEC’s disgorgement remedy, the Court assumed that disgorgement remains an equitable remedy subject to traditional equitable constraints – including Liu’s requirement that disgorgement be “awarded for victims.”

The Court concluded that traditional equitable principles do not require a showing of pecuniary loss and that a “victim” under Liu is any person whose legally protected interests were invaded – not just those who suffered measurable financial harm. As a result, the Court found, neither Liu nor traditional equitable principles require a showing of pecuniary loss to justify disgorgement because disgorgement is measured by a defendant’s ill-gotten gains, not the victim’s loss.

Although the Court’s decision was unanimous, Justice Thomas issued a concurrence advocating for recognizing disgorgement as a legal – rather than equitable – remedy requiring a jury trial under the Seventh Amendment. Justice Thomas’s reasoning was four-fold. First, SEC disgorgement “doesn’t resemble any traditional equitable remedy” such as constructive trusts, equitable liens, or accounting for profits. Second, disgorgement more closely resembles legal restitution via assumpsit – a money judgment based on unjust enrichment – rather than an equitable remedy. Third, Congress’s post-Liu decision to enumerate disgorgement separately from “equitable relief” in the statutory structure of the Securities Exchange Act suggests that Congress intended disgorgement to be a legal remedy. Fourth, the SEC’s own practice confirms that the remedy has a legal character: in 2024, the Commission obtained orders to disgorge US$6.1 billion and returned only US$345 million to victims, a phenomenon Justice Thomas described as “a fines regime.”

Justice Thomas’s concurrence lays the groundwork for future debate over the SEC’s disgorgement authority, the implications of which we discuss further below.

Open questions after Sripetch

The Sripetch decision resolved the pecuniary loss question but did so by carefully sidestepping a set of interlocking issues that may prove consequential for SEC enforcement. These issues stem from a common unanswered question, highlighted by Justice Thomas’s concurrence: following Congress’s enactment of § 78u(d)(7), is disgorgement an equitable or legal remedy?

Circuit courts are already split on the issue. The Fifth Circuit held in SEC v. Hallam that disgorgement is a legal remedy, while the Second Circuit reached the contrary conclusion in SEC v. Ahmed. Although the Sripetch Court “assume[d] without deciding” that disgorgement remains an equitable remedy, Justice Thomas’s concurrence offers a window into how the Court might ultimately approach this question.

If, as the Sripetch Court assumed, disgorgement remains an equitable remedy, questions persist about how disgorgement should be handled when there are no specific identifiable victims and/or when it is otherwise not feasible to distribute disgorged funds to victims. The Supreme Court noted in Liu that it “may be” possible to deposit funds with the Treasury in such cases but expressly declined to resolve the question. The Sripetch decision left this question “for another day yet.” It also remains to be seen how broadly the courts will construe “legally protected interests” when identifying victims of securities law violations now that pecuniary loss is not required.

For defendants facing disgorgement to the SEC for violations of the Foreign Corrupt Practices Act (FCPA) or other securities laws for which there is no readily identifiable “universe of wronged investors,” the courts’ approach to these questions could be critical. Because disgorged funds obtained by the SEC in FCPA enforcement actions are paid to the U.S. Treasury by default, if the Supreme Court ultimately holds that disgorgement to the U.S. Treasury is impermissible even when victim distribution is infeasible, disgorgement may be effectively unavailable to the SEC as a remedy in FCPA matters.

If, however, the courts ultimately determine that disgorgement under § 78u(d)(7) is a legal remedy, the equitable constraints imposed by Liu – including the requirement that disgorgement be “awarded for victims” and be distributed to wronged investors – may fall away. The SEC would no longer need to identify specific victims and could instead deposit disgorged funds with the U.S. Treasury, eliminating some hurdles the SEC has historically faced in collecting disgorgement. But, as Justice Thomas flagged in his concurrence, a legal remedy would entitle defendants to a jury trial under the Seventh Amendment, posing different challenges for the SEC – and opening new avenues for defendants to challenge disgorgement.

Practical takeaways for defendants

The scope of the SEC’s disgorgement power remains in flux after Sripetch, and the next major decision, likely on the Seventh Amendment issue raised by Justice Thomas, has the potential to fundamentally reshape the SEC’s approach. This may have particular impact in the SEC’s FCPA enforcement matters where the class of “victims” may be hard to identify.

For now, defendants facing disgorgement in SEC actions should keep the following in mind:

• The pecuniary loss defense is dead. Sripetch precludesdefendants from arguing that the SEC must prove financial harm to victims in order to seek disgorgement.
• New defense strategies may be available. While the door to the pecuniary loss defense has been closed, others remain open. Defendants facing SEC enforcement and potential disgorgement should evaluate challenges grounded in:
  • The Seventh Amendment jury trial right. Justice Thomas’s concurrence offers a road map to argue that disgorgement under § 78u(d)(7) is a legal remedy requiring a jury trial. As this issue makes its way through the courts, defendants would be wise to preserve it for potential appeal.
  • The victim-distribution requirement. Unless the Court holds that § 78u(d)(7) frees the SEC from Liu’s equitable constraints, defendants can argue that disgorged funds must be “awarded for victims” rather than being deposited into the U.S. Treasury.
  • The “legally protected interests” threshold. The Sripetch Court expressed concern that the SEC might seek disgorgement for securities violations that “do not invade the legally protected interest of any investor.” This potential requirement could function to limit when disgorgement is available, particularly in the context of regulatory or procedural violations.

Defendants facing SEC disgorgement should monitor lower court developments closely and work with counsel to evaluate the impact of any disgorgement-related decisions. The Hogan Lovells team stands ready to advise clients on these complex questions.

Authored by Ann C. Kim, Katie Wellington, Jessica L. Ellsworth, Rupinder Garcha, and Jason Chohonis.