Supreme Court upholds SEC power to recoup illegal gains

The U.S. Supreme Court ruled unanimously Thursday that the Securities and Exchange Commission need not prove investors lost money before forcing wrongdoers to surrender their illegal profits, SCOTUSblog reported.

The decision in Sripetch v. SEC, issued June 4, resolved whether the agency must show that individual investors suffered a "pecuniary loss" before a court can order "disgorgement" — the surrender of illegally obtained gains. The justices said it does not, The Associated Press reported.

Justice Neil Gorsuch, writing for the court, said it was enough to show that a defendant profited from illegal transactions and that "an investor may qualify as a victim of an offender's wrongdoing entitled to compensation," according to the AP.

The case

The ruling went against Ongkaruck Sripetch, a Los Angeles resident who pleaded guilty to selling unregistered securities and was sentenced to 21 months in prison, the AP reported. Gorsuch wrote that Sripetch took part in fraudulent schemes involving at least 20 penny-stock companies, including "pump and dump" operations in which participants bought shares, promoted the companies to drive up their price and then quickly sold.

Reports differ on the size of the disgorgement order he challenged. The AP put it at more than $3 million including interest, while the National Law Review reported the figure exceeded $4.1 million.

A long-running fight over disgorgement

The decision was the third in a series of Supreme Court cases over the SEC's disgorgement powers, according to SCOTUSblog. In Kokesh v. SEC in 2017 and Liu v. SEC in 2020, the court reined in the practice, with Liu limiting any award to a defendant's net profits and requiring that the money be "awarded for victims" rather than deposited with the U.S. Treasury, the National Law Review reported.

Sripetch argued that Liu's "awarded for victims" language meant the SEC had to prove investors lost money. The court disagreed, holding that equitable disgorgement is measured by a defendant's unjust gain rather than the victim's loss, the National Law Review reported. The ruling also resolved a split among the federal appeals courts, with the 9th Circuit having held that proof of financial harm was not required and the 2nd Circuit taking the opposite view.

A question left open

Justice Clarence Thomas filed a concurrence arguing that, after Congress added "disgorgement" to the SEC's statutory tools, the remedy should be treated as a legal one that triggers the right to a jury trial under the Seventh Amendment, SCOTUSblog and the National Law Review reported. The majority expressly declined to decide that question.

The decision arrived during an active term in which the justices have repeatedly weighed the powers of federal agencies and, in a separate order, cleared Alabama to use a disputed congressional map. Investor-fraud disputes have also drawn growing scrutiny in lower courts, including a Tennessee lawsuit alleging fraud that cost investors millions and related claims that put a tax advisory group under investor scrutiny.

Frequently Asked Questions

What is disgorgement?

Disgorgement is a remedy that forces a wrongdoer to give up profits earned through illegal conduct. In securities cases, the SEC uses it to make fraudsters surrender their ill-gotten gains, which are ordinarily returned to investors when feasible.

What did the Supreme Court decide in Sripetch v. SEC?

The court ruled unanimously that the SEC does not have to prove that individual investors suffered a financial loss before a court orders disgorgement. It is enough to show that the defendant profited from illegal conduct that invaded investors' protected interests.

Does disgorged money go to investors or the government?

Under the Supreme Court's 2020 decision in Liu v. SEC, disgorgement awards generally must be limited to a defendant's net profits and awarded for victims rather than deposited with the U.S. Treasury.

What is a "pump and dump" scheme?

A pump and dump is a fraud in which promoters buy shares of a thinly traded stock, hype the company to inflate the share price and then sell their holdings at the peak, leaving later buyers with losses when the price collapses.

Sources

• SCOTUSblog — Justices validate SEC's use of disgorgement in securities enforcement
• ABC News / The Associated Press — Supreme Court upholds broad reading of SEC authority to recoup gains
• The National Law Review — The Supreme Court Rejects Further Limits on SEC Disgorgement

Reporting compiled from court records and the cited source outlets.