The split among federal circuit courts on when the Securities and Exchange Commission (SEC) can obtain disgorgement as a remedy in civil enforcement cases has prompted a man recently convicted of engaging in a "pump and dump" scheme to file a petition for review with the U.S. Supreme Court. After being found liable of engaging in a fraudulent penny stock scheme, Ongkaruck Sripetch was ordered to pay $2.25 million to the SEC in disgorgement of ill-gotten gains. The Ninth Circuit ultimately denied Sripetch’s challenge to the disgorgement order, but it acknowledged contradictory holdings by other federal circuit courts. Disgorgement is a legal remedy that requires companies or an individual to pay back profits that were obtained illegally or unethically.

The Second Circuit held in SEC v. Govil that disgorgement under the Securities Exchange Act of 1934 must be "awarded for victims," which, in the SEC’s view, requires a finding of pecuniary harm before a court may order disgorgement; where no such harm is shown, disgorgement is improper. In contrast, the First Circuit concluded in SEC v. Navellier that a showing of pecuniary harm is not required because disgorgement is a remedy aimed at depriving wrongdoers of net unlawful gains, not merely compensating investors for measured losses. In its recent decision in SEC v. Sripetch the Ninth Circuit expressly aligned with the First Circuit, rejecting the Second Circuit’s approach in Govil, and holding that neither section of the Securities and Exchange Act cited in the other two cases imposes a pecuniary-harm prerequisite to disgorgement.

This split carries immediate practical implications. The SEC litigates a substantial share of its contested enforcement actions in the Second and Ninth Circuits, which now apply opposing standards. Unless and until the Supreme Court intervenes, forum-dependent outcomes are likely to persist, encouraging the SEC to steer cases toward circuits that do not require proof of investor loss and prompting defendants to seek transfer to jurisdictions that do.

History of Disgorgement in SEC Civil Enforcement Actions

Disgorgement has long been in government enforcement actions as a means to make injured parties whole by returning what the wrongdoer gained to the party that suffered a loss. In 2002, Congress codified the ability of the SEC to seek disgorgement in section 15 of the Securities and Exchange Act, which authorized courts to grant the SEC "any equitable relief that may be appropriate or necessary for the benefit of investors."

In the 2020 case Liu v. SEC, the Supreme Court explicitly ratified longstanding lower-court practice by holding that disgorgement qualifies as "equitable relief" and that disgorgement awards under the act’s section dealing with disgorgement must be confined to net profits after legitimate expenses, and the funds should be returned to investors where practicable. In 2021, Congress enacted further legislation, now codified at 15 U.S.C. § 78u(d)(7), which simply states that courts may award the SEC disgorgement in any action brought under any provision of the securities laws.

In the wake of Liu and the update to the disgorgement provision, federal circuit courts have split on two related questions: first, whether Liu’s equitable constraints apply only to disgorgement under the updated section, where the disgorgement is intended to return the defendant’s gains to the wronged investors and not any ill-gotten gains received by others; and second, whether disgorgement requires a showing of pecuniary harm to victims. The Ninth Circuit’s decision in Sripetch focused on the question of pecuniary harm only.

What the Circuit Split Means for Companies Going Forward

Although the Supreme Court declined earlier this year to review the First Circuit’s approach in Navellier, the Ninth Circuit’s Sripetch decision has intensified the conflict and increases the likelihood of U.S. Supreme Court review to resolve the circuit split.

Businesses and individuals can expect continued forum competition and inconsistent remedial outcomes until the Supreme Court resolves the split or Congress clarifies the statute. Companies and individuals facing SEC investigations or litigation should proactively assess venue exposure, the risk of being subject to disgorgement based on the facts of each case, and settlement frameworks calibrated to the governing circuit’s standard.

Our securities and white collar teams have deep experience navigating SEC remedies across circuits, including litigating disgorgement theories post-Liu and advising on venue-specific strategy, parallel proceedings, and settlement leverage.

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