In a significant decision for securities enforcement, the Supreme Court has validated the Securities and Exchange Commission’s (SEC) use of disgorgement without the necessity of proving investor pecuniary loss. This conclusion was reached unanimously in Sripetch v. SEC, marking another chapter in the ongoing saga of how disgorgement is to be applied under the law.
This decision is particularly salient due to its historical backdrop. In earlier cases like Kokesh v. SEC and Liu v. SEC, the Court placed clear constraints on the application of disgorgement. For instance, Liu required that disgorgement must align with the defendant’s net profits, not total revenues, and should ideally be directed to victims not to the U.S. Treasury.
Justice Neil Gorsuch, writing for the Court, underscored that under traditional equitable principles, an entity need not prove pecuniary loss to obtain a disgorgement remedy. Rather, the focus should be on the defendant’s net profits gained from the wrongdoing. The decision, based on traditional equitable principles, allows the SEC to pursue disgorgement without demonstrating harm to specific investors.
However, the case at hand does not permit the SEC to deviate from equitable principles in seeking penalties instead of disgorgement. This boundary was flagged, indicating that future challenges may yet arise, particularly those that could trigger a defendant’s right to a jury trial, as highlighted by Justice Clarence Thomas’s concurrent opinion.
While this decision may provide temporary relief to the SEC, the development suggests that further judicial review on the appropriateness of disgorgement applications may be impending. For more detailed insights, you can read the full decision here.