SEC Power to Recoup Illegal Profits at Risk as Justices Eye Case

The SEC’s practice of forcing defendants to relinquish profits from illegal activities, even when there’s no apparent harm to investors, is under scrutiny again as influential groups urge the US Supreme Court to take up a case that could limit the Wall Street cop’s powers.

The stakes of the fight were laid out in briefs filed this month supporting petitioner Ongkaruck Sripetch, a trader who was ordered to pay more than $2 million in disgorgement by the US Court of Appeals for the Ninth Circuit in September for his role in a pump-and-dump scheme.

The Securities and Exchange Commission, which pulled in a record $6 billion through disgorgement in fiscal 2024 before the Trump administration took over, should only be able to use the tool to return investor losses, according to groups including free market boosters such as the Cato Institute and the California Alternative Investments Association.

But curtailing the SEC’s disgorgement authority would have consequences for the “bread-and-butter investor harm type cases” the agency is prioritizing under Chairman Paul Atkins, said Kiersten Fletcher, a partner at Cahill Gordon & Reindel LLP who focuses on securities and commodities regulatory matters.

“The issue of disgorgement is most relevant in the insider trading context because most insider trading cases brought by the SEC don’t have an identifiable victim with a quantifiable pecuniary loss,” Fletcher said.

Shutting off the SEC’s ability to collect disgorgement in such cases would remove a key tool the agency uses to recover ill-gotten gains and deter future wrongdoing, funneling the payments into the category of penalties and fines, according to securities lawyers.

Nonetheless, the time is ripe for the high court to resolve a growing circuit split over the SEC’s disgorgement power and provide relief particularly for smaller market players facing steep payments even when they didn’t directly harm any victims, advocates supporting Sripetch said.

“A favorable ruling for Sripetch from the Supreme Court would have zero impact on the SEC’s ability to bring the case,” said Nick Morgan, co-founder and president of the Investor Choice Advocates Network, which represents three individual defendants who filed an amicus brief supporting the petitioner. “In fact, they could perhaps get to the same financial outcome if they pursued civil penalties in the same dollar amount rather than disgorgement, which is supposed to be an equitable remedy.”

An SEC spokesperson declined to comment.

Enforcement Toolkit

A Ninth Circuit ruling this year in a different case against Brenda Barry “effectively eviscerates the requirement of pecuniary harm adopted by the Second Circuit,” according to the amicus brief she filed alongside two other defendants represented by ICAN contending with disgorgement in separate SEC actions.

In the Second Circuit case, SEC v. Govil, an appeal panel ruled that the SEC couldn’t obtain $5.8 million in disgorgement from a defendant without showing investors lost money.

The split is important because the Second and Ninth circuits account for most securities litigation.

An SEC suddenly unable to pursue disgorgement broadly may turn to civil penalties and other fines for deterrence, or scale back the extent to which monetary forfeiture factors into its enforcement program writ large.

“You might see more coordination between the SEC and criminal authorities, particularly in the Second Circuit because unless the split is resolved in favor of the SEC, the parallel criminal case is going to be the only way to ensure disgorgement or forfeiture of ill-gotten gains by defendants in those cases,” Fletcher said.

The $6.1 billion the SEC said it obtained in total disgorgement during fiscal 2024 isabout triple the amount it collected through civil penalties.

“The problem with the SEC is that it has money fines language, but it seems to be a weak-ish tool,” said Joel Schwartz, a partner at Parker Poe who has represented clients in SEC cases. “They don’t have limited enforcement power; they have limited pain extraction.”

“Maybe the SEC was created with the ’34 Act and the idea that they were not going to beat the crap out of people because they didn’t want to discourage public companies,” Schwartz added, referring to the 1934 Securities Exchange Act.

Justices’ Choice

The Supreme Court declined to hear a similar case on the matter of disgorgement earlier this year, but a deepening circuit split and outside interest expressed in amicus briefs may inform the justices’ ultimate decision on whether the issue is ripe for review.

“An objective look at the SEC’s track record in recent years with the Supreme Court and appellate courts indicates that, for the most part, the SEC’s arguments on appeal have not been well received,” said Cassandra M. Klosterman Aubert, an associate at Foley & Lardner LLP in the firm’s commercial litigation group.

Disgorgement shouldn’t be used as a “punitive remedy,” CalALTs said in its brief, citing risks to hedge funds and other alternative asset managers that would have a chilling effect on innovation and deprive investors of opportunities in particular jurisdictions.

The Cato Institute took an even broader view, arguing that the case concerns the separation of powers and weaponization of the SEC’s enforcement authority.

The outside parties say it’s time for the high court to bring clarity to a contradictory landscape of differing standards and geographical distinctions on the matter of disgorgement.

“The SEC in many cases has discretion as to whether it wants to bring its case in the Second Circuit or the Ninth Circuit,” Fletcher said. “The understanding of different rules that might be applied depending on location will affect how parties approach pre-suit negotiations.”

“Particularly now, there’s a real lack of certainty over what the rules are,” she said.

Waymaker LLP represents CalALTs. Smith Anderson represents the Cato Institute. The defendants in other SEC disgorgement cases were also represented by Paul Hastings LLP.

The case is Sripetch v. SEC, U.S., No. 25-466.