In a landmark judgment, the United States Court of Appeals for the Second Circuit put a restraint on the Securities and Exchange Commission (SEC)’s enforcement agenda by limiting its capacity to seek disgorgement under 15 U.S.C. § 78u(d)(5) and (7). As the stipulation in the Securities & Exchange Commission v. Govil, No. 22-1658, 2023 WL 7137291 (2d Cir. Oct. 31, 2023) suggests, from now on the SEC can only seek disgorgement in situations where it can provide evidence of investors suffering pecuniary harm. To read the complete case study, click here.
This ruling may pose a significant setback for the SEC, implying that the regulator will need to prove more than mere misconduct by the defendant in order to seek disgorgement orders. This will necessitate a much more strenuous and detailed examination, involving demonstrating that investors have suffered financial injury due to a defendant’s misconduct.
The decision is seen as a major shift in the SEC enforcement regime. Traditionally, the SEC could seek disgorgement from defendants as a preventive measure, essentially asking them to yield profit obtained from their alleged wrongdoing. But the new ruling makes the ability to seek disgorgement conditional on proving monetary damages suffered by investors.
This restriction on disgorgement powers calls into question the potential impacts the ruling might have, particularly considering how integral disgorgement orders have been for the SEC in collecting fines and penalties. The ruling is bound to have significant ramification on both prospective and ongoing SEC investigations and could greatly influence the overall landscape of securities enforcement.
– Notably, the decision does not entirely eliminate the SEC’s power to seek disgorgement but makes the exercise of such power much more challenging.
– Furthermore, the decision may encourage defendants to contest SEC disgorgement claims more aggressively given the newly imposed requirement of proving investor harm.
– Lastly, while the decision falls under the jurisdiction of the 2nd Circuit, it is expected that other courts may adopt this approach, further limiting the SEC’s disgorgement power nationally.