The Cato Institute filed an amicus brief this month urging the U.S. Supreme Court to resolve a growing split among the United States circuit courts of appeals concerning the Securities and Exchange Commission’s authority to seek disgorgement. The request comes shortly after the Ninth Circuit recently upheld a $2.25 million disgorgement order against a defendant in a pump-and-dump case, which we discussed in a previous client alert. The Ninth Circuit held in SEC v. Sripetch that the SEC does not need to demonstrate pecuniary harm to investors in order to justify disgorgement. This interpretation aligns with the First Circuit’s decision in SEC v. Navellier but directly conflicts with the Second Circuit’s 2023 decision in SEC v. Govil, requiring proof of investor loss. 

Cato’s amicus brief supports Sripetch’s petition for writ of certiorari, arguing that the Ninth Circuit’s approach unlawfully delegates legislative power to the SEC to determine when disgorgement is permitted, undermining the right to notice of the consequences of illegal conduct. According to Cato’s amicus brief, the broad authority under 15 U.S.C. 78u(d)(5) and (d)(7), the Securities Exchange Act of 1934 provisions granting  the SEC authority and discretion to seek disgorgement as the Ninth and First Circuit courts permitted raises "serious nondelegation concerns by granting the SEC an amorphous and malleable power to pocket a private person’s property." Requiring a showing of pecuniary harm, by contrast, maintains the "traditional equitable limitations" of disgorgement, without which the SEC may arbitrarily use disgorgement to impose a penalty, rather than to collect ill-gotten gains on behalf of harmed investors. The pecuniary harm follows the Supreme Court’s holding in SEC v. Liu that the disgorgement is not purely punitive in nature.

Cato emphasizes that the issues presented are "ripe for review" because the conflicting judicial interpretations have created substantial uncertainty for market participants and regulators alike. As noted in our previous alert regarding the Ninth Circuit’s holding in Sripetch, the lack of a uniform standard well may lead to inconsistent enforcement outcomes and forum shopping, especially given that the Ninth and the Second Circuits see high volumes of SEC enforcement activity. The California Alternative Investments Association filed a separate amicus brief, as did three appellants in SEC v. Barry, et al., currently pending in the Ninth Circuit.

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