The Securities and Exchange Commission’s enforcement power to win disgorgement of illegal profits has been upheld by the U.S. Supreme Court, Financial Advisor reports.
The high court issued a unanimous ruling in Sripetch v. SEC, a case that focused on whether the SEC must show identifiable investor harm in order to win disgorgement from people and firms found to have engaged in securities fraud.
The justices found that the SEC does not have to show identifiable investor harm in order to recoup ill-gotten gains from those who violated federal securities laws.
Disgorgement requires defendants to relinquish profits they obtained through unlawful conduct, thus ensuring that violators do not retain ill-gotten gains. In fiscal year 2024, the SEC secured orders for more than $6 billion in disgorgement and related interest, almost three-quarters of the commission’s total financial penalties.
The case before the high court involved Ongkaruck Sripetch, who was accused by the SEC of using fraudulent schemes, including ‘pump and dump, in which Sripetch and others bought stocks, promoted them so that their share price rose and then promptly sold them, thus defrauding investors in at least 20 publicly traded companies. Sripetch consented to a judgment against him and was ordered by a federal district judge to give up $3.3 million in profits and interest.
On appeal, Sripetch argued that disgorgement was improper because the SEC had not proven investor losses. The U.S. Court of Appeals for the Ninth Circuit affirmed the disgorgement award for the SEC, joining the First Circuit in finding that an award of disgorgement requires no showing that investors incurred pecuniary harm under 15 U.S.C. § 78u(d)(5) and (d)(7).
The Ninth Circuit acknowledged that its ruling diverged from the Second Circuit’s 2023 opinion in SEC v. Govil, which held that disgorgement in this context does require a finding that investors suffered pecuniary harm.
On the issue of whether the SEC had to prove that individual investors lost money as a result of buying the stocks, the Supreme Court ruled it did not.
Writing for the court, Justice Neil Gorsuch said it was enough to show that Sriptech turned a profit from illegal transactions and that “an investor may qualify as a victim of an offender’s wrongdoing entitled to compensation.”.
Gorsuch said disgorgement traditionally has focused on depriving wrongdoers of money they made illegally.
Under those traditional principles, “a victim seeking disgorgement of a defendant’s unlawful gains does not need to prove he has suffered a corresponding loss or, indeed, any loss,” Gorsuch wrote.
The Supreme Court took up this issue before in 2020 when it ruled the SEC’s disgorgement awards are permissible if they do not exceed the wrongdoer’s net profits and are awarded to victims. Sripetch cited this ruling in his appeal, saying that disgorgement can be used only when the SEC can show the kind of quantifiable harm that would allow for compensation.
The ruling “limited equitable disgorgement to compensating victims,” his lawyers argued in their appeal. “Otherwise, the court explained, wrongdoers would be ‘punished by paying more than a fair compensation to the person wronged.’”
The SEC has reduced the use of disgorgement as an enforcement tool during the Trump Administration, but US Solicitor General D. John Sauer urged the high court not to curb the commission’s authority. “Disgorgement is a ‘profits-focused remedy’ that rests on the principle that a wrongdoer should not ‘make a profit out of his own wrong,’” argued Sauer. “The availability of disgorgement therefore turns on whether the violator has made a profit, not on whether the victim has suffered a loss.”
In the Sripetch case, the petitioner argued that since in this case the SEC failed to identify specific investors who were harmed, disgorgement is not an appropriate remedy. However it was reported that in the oral arguments, the justices generally seemed skeptical of this argument. Most of the justices who spoke to the topic seemed to think that the recovery fell within the plain meaning of the term “disgorgement,” as they repeatedly emphasized that the SEC’s order did nothing more than require Sripetch to turn over his “ill-gotten gains.”
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