Supreme Court Told to Skip Challenge to SEC Disgorgement Powers

The SEC can recover funds an investment adviser obtained through fraud without having to prove investors lost any money, the government said as it urged the US Supreme Court to reject the firm’s bid challenging the agency’s authority.

Navellier & Associates Inc. petitioned the high court after the US Court of Appeals for the First Circuit last July upheld a ruling ordering the disgorgement of $22.7 million in profits the firm made from allegedly misleading clients about the track record of an investment strategy.

The government responded to NAI’s argument in a filing Monday, contending the appeals court correctly ruled disgorgement was necessary without requiring the Securities and Exchange Commission to show investors suffered pecuniary harm.

Damages compensate victims for losses, while disgorgement deprives a wrongdoer of ill-gotten profits. But even in NAI’s case, investors did suffer losses in the form of investment advisory fees that the nearly $23 million disgorgement would remedy, according to the government’s opposition brief.

Unlike private securities fraud plaintiffs, the SEC doesn’t need to show investors relied on the misrepresentation alleged in its enforcement action, the agency said in its brief.

NAI allegedly recommended a licensed strategy to clients, knowing that its performance history couldn’t be verified, and sold the accounts without alerting investors once liability became a concern, the SEC said in its initial enforcement action.

The investment adviser allegedly ignored red flags about the Vireo AlphaSector strategy, and upon realizing that the performance history wasn’t based on actual trades, sold it to F-Squared Investments Inc., which separately paid $35 million to settle SEC fraud charges.

The appeals court said in its ruling that disgorgement wouldn’t only benefit the public, but would also provide relief to investors who bought the investment strategy at NAI’s recommendation and paid fees accordingly.

The Supreme Court in its 2020 Liu v. SEC decision said the agency could seek disgorgement, but that it must be “awarded for victims.” Congress responded by passing a measure (Public Law 116-283) to explicitly codify the SEC’s disgorgement powers, but appellate courts remain divided on whether the agency needs to show investors suffered financial losses.

The SEC obtained a record $6.09 billion through disgorgement in fiscal 2024, about triple what it collected in 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, opposition brief 5/5/25.