SEC Disgorgement Power Returns to the Supreme Court
The U.S. Supreme Court will decide whether the U.S. Securities & Exchange Commission must prove that investors suffered financial harm before federal courts can order profit disgorgement.
This month, the U.S. Supreme Court agreed to review SEC v. Sripetch, to answer the question whether the U.S. Securities & Exchange Commission (“SEC”) must prove that investors suffered pecuniary harm before federal courts can order wrongdoers to disgorge their profits from violating the federal securities laws.1 The question tests whether Congress has, by statute, freed the SEC’s disgorgement power from traditional equitable bounds, including the notion that disgorgement should focus on restoring victims rather than punishing wrongdoers. For companies and individuals investigated by the SEC’s Enforcement Division, the stakes are substantial: disgorgement of profits has become the Commission’s dominant monetary remedy, even for violations for which no identifiable victim lost money.
Sripetch marks the fourth time in nine years that the Court will review the Commission’s remedial powers and the third time it will address disgorgement. Each time, the Court imposed meaningful limits on the SEC’s authority, reshaping enforcement practice. Yet it remains to be seen whether that trend repeats itself, especially in light of amendments to the federal securities laws enacted by Congress in response to some of those prior decisions.
Background and Precedent
For decades beginning in the 1970s, courts permitted the SEC to pursue disgorgement under the “general equitable authority” conferred on the agency under the Exchange Act. In 2002, Congress codified 15 U.S.C. § 78u(d)(5), authorizing the SEC to pursue “equitable relief” where “appropriate or necessary for the benefit of investors.” In 2017, the Court in Kokesh v. SEC held that disgorgement ordered under that subsection functioned as a “penalty” for purposes of the statute of limitations found in 28 U.S.C. § 2462, a ruling that constrained the disgorgement remedy and cast doubt on disgorgement’s equitable character.2 Three years later, the Court in Liu v. SEC reaffirmed the SEC’s ability to seek disgorgement while narrowing the remedy’s permissible scope, holding that disgorgement may qualify as “equitable relief,” and not a penalty, if limited to a wrongdoer’s net profits from the violation, and “awarded for victims.” 3 Justice Thomas’ dissent argued that § 78u(d)(5) does not authorize disgorgement because it was not a traditional equitable remedy; that the Liu majority improperly equated disgorgement with the distinct remedy of “accounting for profits”; and that modern disgorgement—paid to the government, which may or may not distribute proceeds to victims—reflects a 20th‑century innovation that risks “great mischief” by producing punitive, non‑equitable outcomes.
Six months after Liu, Congress enacted § 78u(d)(7), authorizing courts to order “disgorgement” of the wrongdoer’s “unjust enrichment.” The absence of any reference to “equitable relief” in the new provisions prompted swift disagreement amongst the appeals courts over whether Congress had created a statutory remedy unconstrained by Liu. The Fifth Circuit adopted that view in SEC v. Hallum, concluding that § 78u(d)(7) authorizes “legal” disgorgement freed from Liu’s equitable limits.4 Less than a year later, the Second Circuit disagreed in SEC v. Ahmed, holding instead that Congress merely clarified disgorgement’s availability under the Exchange Act without discarding its equitable limitations, so that disgorgement under both §§ 78u(d)(5) and (d)(7) are limited by equitable principles.5
That debate intensified soon after in SEC v. Govil.6 There, a different panel of the Second Circuit interpreted Liu’s requirement that equitable disgorgement must be “awarded for victims.” The Govil court defined “victim” for purposes of the federal securities laws as “one who suffers pecuniary harm from the securities fraud.” Adhering to Ahmed, the Govil court concluded that both (d)(7) and (d)(5) obligate the SEC to establish that investors suffered pecuniary harm as a precondition to obtaining disgorgement. Other circuits declined to follow Govil. Most recently, the Ninth Circuit in Sripetch, while agreeing that § 78u(d)(7) incorporates equitable principles, rejected the Second Circuit’s pecuniary-harm requirement and concluded that a claimant “need only show an actionable interference by the defendant with the claimant’s legally protected interests” to pursue equitable disgorgement. That ruling created a direct conflict now before the Court.
Implications for Market Participants
The legal (or equitable) foundation of disgorgement has a direct and significant effect on settlement posture and negotiation dynamics in SEC enforcement matters. For instance, in FY 2024, the SEC obtained $6.1 billion in disgorgement and prejudgment interest compared with $2.1 billion in civil penalties.7 As a result, disgorgement often feels less like an equitable device aimed at restoration and more like a second, and larger, penalty layered atop the statutory one.
Although the SEC has not fared well before the Court in recent remedial cases, those decisions do not necessarily predict the outcome here. Congress’s enactment of § 78u(d)(7) introduced a statutory dimension absent from earlier cases. If the Court concludes that § 78u(d)(7) created a statutory unjust‑enrichment-based remedy independent of equity, then the existence (or absence) of investor harm is irrelevant to that remedy. If the Court instead treats § 78u(d)(7) as equitable, then Liu’s limitations will apply, and the Court will need to decide whether a showing of pecuniary harm is required. Liu contains language that defendants may rely on, including the Court’s observation that directing a wrongdoer’s disgorged proceeds to the Treasury, rather than to victims—as is sometimes the SEC’s practice—is in “considerable tension with equity practice,” and its warning that Congress’s use of the term “disgorgement” in other statutes did not silently expand the remedy beyond traditional equitable limits. The government is expected to counter that § 78u(d)(7)’s focus on a wrongdoer’s “unjust enrichment” signals congressional intent to authorize a broader remedy centered on the wrongdoer’s gain rather than investor loss.
The Court’s decision will have immediate consequences for the SEC’s enforcement strategy. A ruling that adopts Govil’s pecuniary‑harm requirement would limit the SEC’s ability to obtain disgorgement in cases where investor loss is diffuse or difficult to measure, including insider‑trading and market‑manipulation matters. A ruling in line with the Ninth Circuit would preserve disgorgement as a tool focused on ill-gotten gains and leave the SEC’s leverage largely intact. The Court might also chart a broader course by grounding its decision in the statutory distinction between § 78u(d)(5) and § 78u(d)(7), thereby resolving whether Congress intended to create a remedy unconstrained by equitable limitations. With billions of dollars in annual recoveries and an increasingly fractured doctrinal landscape, the Court’s decision is poised to define disgorgement’s role in securities enforcement for years to come.
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1 154 F.4th 980 (9th Cir. 2025).
2 581 U.S. 455 (2017).
3 591 U.S. 71 (2020).
4 42 F.4th 316 (5th Cir. 2022).
5 72 F.4th 379, 396 (2d Cir. 2023).
6 86 F.4th 89 (2d Cir. 2023).
7 SEC Press Release No. 2024-186, SEC Announces Enforcement Results for Fiscal Year 2024 (Nov. 22, 2024), https://www.sec.gov/newsroom/press-releases/2024-186.
