Supreme Court Clarifies Scope Of SEC Disgorgement—But Key Questions Remain For Enforcement Targets

For over 50 years, the SEC has routinely sought “disgorgement” from defendants when resolving enforcement actions. However, case law emerging over the last decade, and a 2022 amendment to the statute governing the SEC’s authority to obtain monetary relief in enforcement actions, resulted in uncertainty about what, exactly, “disgorgement” means.

Last week, in Sripetch v. SEC, the Supreme Court attempted to bring some clarity to this issue, resolving a circuit split and holding that the SEC does not need to show a victim suffered pecuniary loss to obtain disgorgement. Still, Sripetch left unresolved a number of questions that are likely to be highly relevant in future enforcement actions and, in particular, settlement negotiations with the Commission.

Background

For decades, the SEC has routinely sought “disgorgement” as a form of financial relief against alleged violators of the federal securities laws. Before 2022, no statute gave the SEC authority to obtain disgorgement, but the SEC took the position that seeking disgorgement was permissible given its general powers to obtain equitable relief for investors. Congress reinforced the SEC’s equitable-relief power in 2002, when it amended the 15 U.S.C. § 78u(d)(5) to make explicit that the SEC could seek and obtain, in federal court, “any equitable relief that may be appropriate or necessary for the benefit of investors,” although the statute did not explicitly mention disgorgement.

In 2020, the Supreme Court decided Liu v. SEC, holding that disgorgement may in fact qualify as “equitable relief” under 15 U.S.C. § 78u(d)(5), but only if it comports with traditional equitable principles. Most notably, the Court explained that disgorgement must be limited to the defendant’s “net profits” and should generally be awarded “for victims,” rather than deposited with the United States Treasury.

Following Liu, Congress again amended the Securities Exchange Act and added 15 U.S.C. § 78u(d)(7), expressly authorizing the SEC to seek “disgorgement” of “any unjust enrichment,” as an additional form of relief the SEC can seek and obtain as a result of a securities law violation.

The Decision

In Sripetch, the Court held that the SEC does not need to show investor loss to obtain disgorgement under the securities laws. The Court assumed, without deciding, that disgorgement remains an equitable remedy even after the addition of 15 U.S.C. § 78u(d)(7). Applying traditional equitable principles, the Court explained that disgorgement is designed to “deprive wrongdoers of their net profits from unlawful activity,” rather than to compensate victims for losses. As a result, the proper focus of the disgorgement analysis is the defendant’s gain from the wrongdoing, not the victim’s loss.

Consistent with that framework, the Court emphasized that a party seeking disgorgement need not demonstrate that it “has suffered a corresponding loss or, indeed, any loss.” Instead, it is sufficient to show that the defendant interfered with legally protected interests and obtained a benefit as a result of that conduct.

Practical Significance

The Court’s decision provides useful clarity on one issue that has been the subject of significant litigation: the SEC need not prove investor losses to seek disgorgement. This holding eliminates a defense that had gained traction in some courts and confirms that disgorgement remains available even in cases where harm to investors is difficult to quantify—or potentially absent altogether.

At the same time, the Court’s opinion underscores that disgorgement must still be tethered to traditional principles of equity, including that the disgorgement must be “causally connected to [the defendant’s] unlawful conduct.”

Key Open Questions

1. How Is the Defendant’s “Gain” Calculated?

In relatively straightforward matters—such as fraud in the inducement cases involving discrete investment proceeds—the calculation of disgorgement may be relatively simple. But in more complicated cases, including accounting fraud, market manipulation, or conduct affecting ongoing business operations, isolating the portion of profits “causally connected” to the alleged misconduct can be significantly more difficult.

Questions are likely to arise as to:

• how to separate lawful from unlawful revenues;
• what costs may be deducted in determining “net profits”; and
• the degree of causal connection required between the conduct and the alleged gain.

These issues, while not new, take on increased importance in light of the Court’s emphasis on gain rather than loss.

2. What Constitutes an “Equitable” Measure of Gain?

Even where gross proceeds can be identified, the Court’s opinion suggests that disgorgement must remain consistent with equitable principles. That raises the question whether gross revenue—or even net profits—will always constitute an appropriate measure of “gain.”

In some circumstances, a defendant’s profits may be affected by factors unrelated to the alleged misconduct, including:

• broader market movements;
• independent business decisions; or
• third-party conduct.

To the extent those factors materially contribute to the defendant’s gains, respondents in SEC actions may argue that a strict gross-proceeds measure overstates any “unjust enrichment” and is inconsistent with equitable limitations on disgorgement.

3. Does the Absence of Investor Loss Matter?

Although the Court held that proof of investor loss is not required, it did not address whether the absence of loss may nonetheless be relevant in determining the appropriate amount of disgorgement.

In particular, parties may argue that where investors suffered no measurable harm—or where benefits flowed to market participants notwithstanding the alleged misconduct—those facts should inform the equitable analysis of what amount, if any, should be disgorged.

Whether and how courts incorporate such considerations into disgorgement calculations remains an open question.

4. Continued Uncertainty Regarding the Nature of Disgorgement

In addition to these questions, Justice Thomas’s concurrence highlights another issue that will likely result in litigation. Specifically, Justice Thomas asserted that, “[i]n a future case, we should recognize that disgorgement is now a legal,” i.e., not equitable, “remedy” in light of the amendments to 15 U.S.C. 78u(d)(7), “for which the Seventh Amendment requires a jury trial.” That issue has implications for, among other things, the availability of jury trials and the broader procedural framework governing SEC enforcement actions.

Implications for Settlement Negotiations

These unresolved questions are likely to be particularly salient in the settlement context. With the loss requirement no longer at issue, negotiations are likely to focus more heavily on:

• the methodology used to calculate alleged gains;
• the appropriate deductions and offsets; and
• the equitable considerations relevant to determining the ultimate disgorgement amount.

Respondents may find greater room to engage with the SEC on these issues, particularly in cases where the connection between the alleged misconduct and the asserted gains is attenuated or where external factors contributed materially to financial outcomes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.