In its recent session, the U.S. Supreme Court engaged in deliberations that could significantly impact the Securities and Exchange Commission’s (SEC) ability to execute its disgorgement authority. The case, Sripetch v. Securities and Exchange Commission, revisits the SEC’s requirement to prove economic harm to investors when reclaiming unlawful profits from wrongdoers reported by JURIST. The heart of the matter lies in whether disgorgement, typically viewed as equitable relief, requires demonstrable investor loss.
The case stems from the actions of Ongkaruck Sripetch, who pleaded guilty to selling unregistered securities. In the following SEC civil enforcement, the Ninth Circuit confirmed a district court’s decision requiring Sripetch to repay over $3 million. This decision did not mandate proof of investor harm, merely the presence of unjust gains.
The oral arguments highlighted a deep divide among justices regarding the nature of disgorgement versus penalties. Daniel Geyser, representing Sripetch, argued that the SEC must employ the “rules and hoops” applicable to penalties, which are punitive. This assertion was challenged by Justice Ketanji Brown Jackson and Justice Sonia Sotomayor, who questioned why surrendering illegal profits should be viewed as a penalty at all when it’s merely restitution of wrongfully acquired funds.
Justice Amy Coney Barrett further explored the boundaries set by Liu v. SEC, a pivotal 2020 ruling allowing SEC disgorgement under certain restrictions. Geyser contended that Liu’s distinctions between disgorgement and penalties supported a statutory reading that emphasizes separate standards for each action.
Deputy Solicitor General Malcolm L. Stewart argued on behalf of the SEC, suggesting that the SEC’s disgorgement does not necessarily mandate a return to investors to fulfill its legal obligations—an assertion met with skepticism from Justice Neil Gorsuch. He expressed concern that upholding this view could undermine equity principles by sidestepping jury involvement in what could effectively be punitive actions.
The potential implications of this case resonate with past decisions, notably SEC v. Jarkesy, where the necessity of Article III court procedures for monetary penalties was affirmed as discussed by Reuters.
Stewart’s argument that Congress granted the SEC leeway through several statutory provisions was met with probing by Justice Gorsuch regarding the agency’s collection success and its efforts to return funds to victims. The exchange underscored the challenge of balancing enforcement effectiveness with procedural fairness.
With a decision anticipated by June, this case may redefine the balance between SEC’s enforcement power and the rights of those accused of securities violations to a fair process. The outcome could clarify whether disgorgement, as utilized by the SEC, stands as a mechanism for restitution or a concealed punitive measure.