Supreme Court to Decide on Disagreements Among Circuits Over SEC’s Authority to Seek Disgorgement

The U.S. Supreme Court has granted a writ of certiorari in SEC v. Sripetch to tackle a Circuit split on the standards for the SEC to secure disgorgement. A recent ruling in the Ninth Circuit case affirmed a $2 million disgorgement award in favor of the SEC without requiring proof of pecuniary harm to investors, unlike the previous Second Circuit decision in SEC v. Govil.

The impending Supreme Court decision aims to resolve the disparity in standards across different circuits regarding the SEC’s authority to seek disgorgement, providing uniformity in the application of the law nationwide. The split arose from the Supreme Court’s 2020 decision in Liu v. SEC, which categorized disgorgement as equitable relief under the Exchange Act and set limitations on its scope, emphasizing the need for disgorgement awards to match a wrongdoer’s net profits.

Following Liu, the Second Circuit’s Govil decision introduced a requirement for victims to demonstrate pecuniary harm to qualify for disgorgement, emphasizing the role of economic loss in defining victims. This approach aimed to prevent windfalls and ensure the restoration of the status quo for affected investors. However, the First Circuit in SEC v. Navellier & Associates, Inc. took a different stance, emphasizing unjust enrichment principles and equitable relief availability even in the absence of direct financial losses to victims.

More recently, the Ninth Circuit challenged the Second Circuit’s interpretation in the Sripetch case, where the SEC sought disgorgement of ill-gotten gains from securities violations. The Ninth Circuit agreed that disgorgement necessitates victims but diverged from Govil by rejecting the pecuniary harm requirement, aligning with the First Circuit’s profit-based unjust enrichment approach and emphasizing common law principles and traditional equity practices.

The Supreme Court’s intervention in this matter signifies the importance of providing clarity on the SEC’s authority to seek disgorgement and determining the standards for such awards nationwide. As the Court deliberates on this issue, the outcome will have far-reaching implications for future SEC enforcement actions and the application of equitable relief in cases of securities fraud. By addressing the Circuit split and harmonizing the legal standards for disgorgement, the Supreme Court aims to streamline the SEC’s enforcement capabilities and ensure consistency in the administration of justice across different jurisdictions.