One of the key enforcement tools used by the Securities and Exchange Commission will be reviewed in a case before the U.S. Supreme Court, according to Bloomberg and Yahoo Finance.
The nation’s highest court granted a writ of certiorari in SEC v. Sripetch, and will decide whether the SEC must show identifiable investor harm in order to win disgorgement from people and firms found to have engaged in securities fraud.
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 involves Ongkaruck Sripetch, who was accused by the SEC of using fraudulent schemes, including ‘pump and dump, to defraud 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, Sriptech 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.
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 cites 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.”
The Supreme Court is expected to hear arguments in the case in April and issue its ruling by July.
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