Supreme Court Skips Firm’s Challenge to SEC Disgorgement Power

The SEC’s practice of recovering funds obtained through fraud without first having to prove investors lost any money will avoid a closer look from the US Supreme Court.

The justices denied a petition Friday asking them to review a July 2024 ruling from the US Court of Appeals for the First Circuit upholding an order that required investment firm Navellier & Associates Inc. to disgorge $22.7 million in profits made from allegedly misleading clients on an investment strategy’s track record.

The First Circuit’s ruling conflicts directly with a 2020 Supreme Court decision holding that the Securities and Exchange Commission can seek to recover ill-gotten gains but only if they’re awarded to victims, NAI had argued in a brief. The investment firm said the SEC exceeded its authority in the case at hand since the supposed victims suffered no pecuniary harm.

The government, on the other hand, argued the appeals court ruled correctly that the SEC could pursue disgorgement even without showing investors suffered financial harm, drawing a distinction from damages meant to compensate victims for losses. Even so, NAI’s investor clients did suffer losses stemming from investment advisory fees, which would be remedied by the disgorgement, the government said in a May brief urging the justices to skip the petition.

Private securities fraud plaintiffs, who still need to show investors relied on the misrepresentation alleged in a given suit, likely wouldn’t have been affected by a new Supreme Court ruling on federal agencies using disgorgement as a tool in enforcement actions.

The original SEC enforcement action alleged that NAI recommended a licensed strategy to clients even though its performance history couldn’t be verified, and later sold accounts due to liability concerns without alerting clients first. The red flags raised by the Vireo AlphaSector strategy went unaddressed until the investment adviser opted to sell to F-Squared Investments Inc., a company that separately settled SEC fraud charges for $35 million.

The Supreme Court’s previous disgorgement ruling in Liu v. SEC prompted Congress to pass a measure (Public Law 116-283) codifying the SEC’s authority, but appellate courts still disagreed on whether the agency needs to show investors suffered financial losses.

In a supplemental brief urging the Supreme Court take up its case, NAI also pointed to the justices’ May ruling in Kousisis v. United States on the government’s authority to prosecute fraud. The high court in that case ruled the government doesn’t need to prove economic harm to bring a fraud claim, but a concurrence from Justice Neil Gorsuch said the government shouldn’t be enforcing “victimless” fraud or “lies without injury.”

Last year alone, the SEC recovered $6.09 billion through disgorgement, setting a record over previous years and tripling the amount collected through civil penalties, according to the agency’s annual enforcement report.

Samuel Kornhauser, who practices in San Francisco, represents NAI.

The case is Navellier & Associates Inc. v. SEC, U.S., No. 24-949, 6/6/25.