The Supreme Court Could Defang the SEC’s Most Powerful Remedy

The Securities and Exchange Commission’s most powerful monetary remedy is disgorgement—the equitable mechanism that strips defendants of their ill-gotten gains regardless of whether any victim can be identified or any dollar of loss can be traced.

In theory, disgorgement simply puts a wrongdoer back where they started. In practice, it operates as something closer to a penalty: A court orders the defendant to pay the full amount of profits derived from the violation, and those funds go into a Fair Fund for eventual distribution to harmed investors—if any can be found.

The US Supreme Court is about to consider whether that “if any” qualifier matters. In Sripetch v. SEC, scheduled for argument on April 20, the Supreme Court could resolve a circuit split on a question that goes to the foundation of the SEC’s remedial authority: Must the SEC show that its enforcement target’s conduct caused pecuniary harm to investors before a court can award disgorgement?

The stakes are real. In fiscal year 2024, the SEC secured more than $6 billion in disgorgement and related prejudgment interest—nearly three-quarters of the SEC’s total financial remedies. The answer in Sripetch will reshape settlement negotiations, litigation strategy, and the SEC’s institutional incentives in every enforcement action where disgorgement is on the table.

The Circuit Split

The US Court of Appeals for the Second Circuit held in SEC v. Govil that the SEC must demonstrate pecuniary harm before obtaining disgorgement.

The reasoning was straightforward: Disgorgement is an equitable remedy, and equity has always required a showing that someone was actually injured. A court sitting in equity doesn’t strip a defendant of profits simply because a violation occurred—it does so to make victims whole.

Without victims who suffered financial harm, there is no equitable basis for the remedy. In Govil, the SEC alleged that the defendant caused the company he founded, Cemtrex, to issue securities under false pretenses. But the SEC offered no proof that investors suffered pecuniary harm. The Second Circuit vacated the disgorgement order and remanded for that determination.

The Ninth Circuit, in Sripetch, rejected that requirement. Sripetch orchestrated a series of pump-and-dump and scalping schemes involving nearly 20 microcap companies—the kind of case where the SEC’s ability to identify and quantify harm to specific investors is inherently limited.

The Ninth Circuit upheld a $2.2 million disgorgement order without requiring a showing of pecuniary harm. It reasoned that the 2021 congressional amendments to Section 21(d) of the Exchange Act expressly authorized the SEC to seek disgorgement in federal court. Congress didn’t condition that authority on a showing of pecuniary harm. The statute says the SEC may seek disgorgement; it doesn’t say the SEC may seek disgorgement only when investors have been financially harmed. The First Circuit has reached the same conclusion.

So three circuits have come up with two irreconcilable positions. The question is which framework the Supreme Court will adopt—and what the practical consequences will be.

What’s at Stake

The case matters most in a category of SEC enforcement actions that is larger than most practitioners appreciate—those where the violation generated profits for the defendant but didn’t cause quantifiable financial harm to any identifiable investor.

Insider trading is the paradigm. Say a corporate insider trades on material nonpublic information and makes $5 million. The SEC brings an enforcement action and seeks disgorgement of the $5 million. But who was harmed? The anonymous counterparties on the other side of the insider’s trades would have traded anyway, as they didn’t know about the inside information and weren’t induced to buy or sell by the insider’s conduct. The market absorbed the insider’s trades without measurable distortion. The insider’s profit didn’t come “from” any investor’s pocket in the way that, say, a Ponzi scheme operator’s profits come from defrauded investors.

Under the Second Circuit’s approach, the SEC would need to identify and quantify the pecuniary harm caused by the insider trading before obtaining disgorgement. That is a difficult or impossible burden to carry in many insider trading cases. Under the Ninth Circuit’s approach, the SEC need only show that the defendant violated the securities laws and profited from the violation. The absence of identifiable victims is irrelevant.

The same tension appears across the enforcement landscape—market manipulation cases, registration violations, books-and-records cases, and accounting fraud matters where the defendant profited from the misconduct but the chain of causation between the violation and investor harm is attenuated or speculative.

Liu and Legislative Background

Sripetch is the sequel to 2020’s Liu v. SEC, where the Supreme Court held that SEC disgorgement in federal court must be limited to the defendant’s net profits (not gross revenue) and that the funds must be returned to victims rather than retained by the government. Liu treated disgorgement as an equitable remedy bounded by traditional equitable principles—a remedy for victims, not a penalty by another name.

Congress responded in 2021 by amending Section 21(d) to expressly authorize the SEC to seek disgorgement in federal court, codifying the remedy that Liu had questioned and partially constrained. The legislative history is sparse on whether Congress intended to override Liu’s equitable limitations or simply confirm the statutory basis for disgorgement while leaving the equitable guardrails intact.

That ambiguity is at the heart of Sripetch. The SEC argues that the 2021 amendments superseded Liu’s equitable framework and that Congress created a statutory disgorgement remedy unconstrained by traditional equitable requirements such as pecuniary harm. Sripetch argues that the amendments were clarifying, not expanding—and that nothing in the statutory text or legislative history suggests Congress intended to strip courts of the discretion to require a showing of harm before ordering a defendant to pay.

When the justices take the bench on April 20, the key signals will be whether the Supreme Court treats the 2021 amendments as a clean statutory grant of disgorgement authority—freeing the remedy from traditional equitable constraints—or as a codification that left Liu’s guardrails intact.

Listen for questions probing the outer limits of the SEC’s position: If disgorgement requires no showing of harm, what distinguishes it from a penalty? And if it is a penalty, does the Eighth Amendment’s Excessive Fines Clause apply? The answers will reshape the economics of SEC enforcement for years to come.

The case is Sripetch v. Securities and Exchange Commission, U.S., No. 25-466, to be argued 4/20/26.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Ashwin J. Ram is a partner and co-chair of Buchalter’s white collar and investigations practice, and a former assistant US attorney in the major frauds section of the Justice Department.

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