Seeking to resolve a long-running circuit split regarding the proof of investor harm by the Securities and Exchange Commission (SEC) for purposes of a disgorgement order, the Supreme Court has agreed to hear the appeal of SEC v. Sripetch, recently decided by the Ninth Circuit. As noted in our previous alert, the Ninth Circuit expressly aligned with the First Circuit’s decision in SEC v. Navellier that a showing of pecuniary harm is not required because disgorgement under the Securities Exchange Act of 1934 is a remedy aimed at depriving wrongdoers of net unlawful gains, not merely compensating investors. In doing so, the Sripetch decision rejected the SEC v. Govil decision from the Second Circuit, one of several federal circuit courts that have stated that disgorgement must be "awarded for victims." The Ninth Circuit decision adds to the circuit split, setting up the Supreme Court review.

The petition for review was filed by investment adviser Ongkaruck Sripetch, who faced a civil enforcement action by the SEC for engaging in a “pump and dump” scheme involving numerous penny stocks. Sripetch consented to a judgment against him but held open the question of what his punishment should be. The trial court ordered Sripetch to pay $2.25 million to the SEC in disgorgement of ill-gotten gains. Sripetch disagreed, arguing that the SEC failed to present evidence of specific investors who were harmed and in what amounts. While acknowledging a split in opinions among the circuit courts of appeal, the Ninth Circuit ruled against him.

The circuit split over whether the SEC must show pecuniary losses to investors arises from a perceived distinction between the language of the statute. The broad language of 15 U.S.C. § 78u(d)(5) permits the SEC to “seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors […] [i]n any action or proceeding brought or instituted by the Commission under any provision of the securities laws.” This provision was a product of the Sarbanes-Oxley Act of 2002. In 2020, the Supreme Court, in Liu v. SEC, ruled that disgorgement qualified as a form of equitable relief under this provision. Then, in 2021, Congress amended the statute to expressly add the authority of the SEC in § 78u(d)(7) to seek and receive disgorgement “in any action or proceeding brought by the Commission under any provision of the securities laws.” Lower courts long have used the language of (d)(5) to support the imposition of disgorgement as a form of equitable relief, where the disgorgement takes ill-gotten gains but does not return investors’ monetary losses to investors. Section 78u(d)(7) has raised divergent views of the availability of disgorgement.

Notably, neither Sripetch nor the SEC asks the Supreme Court to decide if disgorgement itself is solely classified as equitable relief rather than a legal remedy. The question both parties present to the Supreme Court is the more nuanced issue of whether an “actionable interference” with a victim’s legally protected interest is sufficient harm to justify disgorgement of ill-gotten gains of the wrongdoer. In other words, is the SEC limited in recovery to the amount lost by investors, even if the wrongdoer individually received a greater profit through the fraud?

Sripetch argues in his petition that a Supreme Court decision will resolve the “intolerable confusion” raised by the circuit split for those subject to SEC enforcement actions.

The SEC urges the justices to affirm the Ninth Circuit’s holding, agreeing that there was a split but that the holding in Liu “does not require a finding of pecuniary harm” for disgorgement orders to stand. However, the SEC does not rely on this as a showing of pecuniary harm but uses the language of the statute to argue that disgorgement as used in Section 78u(d)(5) is focused on surrender of the ill-gotten gains of the wrongdoer. Similarly, the SEC argues that the absence of a specific reference to “equitable relief” in Section 78u(d)(7) permits disgorgement to avoid unjust enrichment, and not collection of suffered losses of the investors. Both parties argued that the importance of disgorgement as a remedy used by the SEC warranted review by the court.

While pecuniary interest is only one of several outstanding questions regarding the availability and calculation of disgorgement by the SEC, whether a showing of pecuniary harm is required will go a long way toward clarifying the economic liability of SEC enforcement defendants and the right of the SEC to collect ill-gotten gains when there is no financial loss to investors. And the Supreme Court agreeing to hear the case, hopefully, will result in there being a single standard to govern this issue, no matter where in the country the accused is located.

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