Chief compliance officers (CCOs) at U.S. financial firms need to keep a close eye this year on what the Supreme Court decides about when and how the Securities and Exchange Commission (SEC) should impose disgorgement of illegal profits from violations of securities laws.
The high court’s final say on the matter could either spell a lot more angst for CCOs or a sigh of relief by resolving a major split between U.S. federal circuit courts on the issue of whether the SEC may seek “disgorgement” from fraudsters regardless of whether it can prove investors have suffered any financial loss from their misdeeds. The regulatory agency uses disgorgement — a legal term for seizing illegal profits — as a powerful tool for deterring future civil violations. However, only a fraction of the funds ever makes its way to harmed investors. Most end up in the hands of the U.S. Treasury instead because the injured parties can’t be identified. In fiscal 2024 alone, the SEC won about USD$8.2 billion in total fines of which disgorgement and prejudgment interest came to a whopping USD$6.1 billion. Investors only received USD$345 million with the remainder allocated for civil penalties. (Fiscal 2024 represented the time between October 1, 2023 through September 30, 2024).
In late 2025, the Commission and Ongkaruck Sripetch, a trader who settled with the U.S. regulatory agency in September 2023 to pay over USD$3 million, asked asked the U.S’ highest court to revisit the issue of disgorgement after the Ninth Circuit Court of Appeals on September 3, 2025 ruled against him. The Ninth Circuit upheld a lower California court decision on April 17, 2024 that the SEC could collect payment for investors regardless of whether they have been financially damaged. That federal appeals court disagreed with a 2023 decision made by the Second Circuit Court of Appeals in the case of the SEC v. Govil that the regulatory agency must prove investors have suffered a “pecuniary loss” before it can impose disgorgement. Instead, the Ninth Circuit echoed the stance of the First Circuit Court of Appeals in its July 16, 2024 ruling on the case of the SEC v. Navellier & Associates. The Ninth Circuit is the largest of the U.S’ 13 circuit courts by geographic area representing Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington State. The Second Circuit reviews cases in Connecticut, New York and Vermont while the First Circuit handles Maine, Massachusetts, New Hampshire, Puerto Rico and Rhode Island.
The SEC is hoping the Supreme Court upholds the Ninth Circuit’s ruling, while Sripetch wants it to overturn that decision. Three organizations have filed amicus briefs with the high court favoring Sripetch’s stance, albeit for different reasons. They are the Cato Institute, the California Alternative Investments Association (CalALTs) and the Investor Choice Advocates Network (ICAN) which is representing three defendants — Brenda Barry, Caleb Moody, and Eric Cannon whose case is up for a rehearing by the Ninth Circuit. The trio worked as sales agents for Pacific West Capital Group (PWCG), which sold fractional interests in unregistered “life settlement products” or the payouts from other individuals’ life insurance policies. Despite never claiming that the three defendants committed fraud and noting that investors would receive up to 100 percent of their money back, the Ninth Circuit on August 11, 2025 agreed with the SEC that Barry, Moody, and Cannon must return more than USD$676,300 combined to the regulatory agency. (In June 2018, PWCG reached a separate USD$64.5 million settlement with the SEC and relinquished control to a receiver). The appeals court reasoned that investors had suffered financial harm through the loss of the “time value” of their money, but that’s not how legal experts feel. “If the ruling is left unclarified, the SEC could impose disgorgement in almost any SEC case in which investors claim to have incurred delays in recovering their investment,” warned Thomas Zaccaro and Mindy Vo, attorneys at Hueston Hennigan LLP in a recent article in the Los Angeles & San Francisco Daily Journal. “This is particularly worrisome because in the case [involving Barry] the returns on investors’ original investment were to be paid to investors when the insured died.” Therefore, the attorneys who hoped the Supreme Court would review Sripech’s case, said that delays recovering the original investment were not related to any securities violations. Instead, the longevity of the insured was involved.
In June 2025, the Supreme Court refused to hear an appeal on the case involving Navellier & Associates allowing the First Circuit Court’s ruling to stand. However, legal experts are optimistic that the case involving Sripetch could force the high court’s hand because the SEC has asked the highest court to intervene. Although it agreed with the Ninth Circuit’s stance, the Commission wants clarity on a nationwide basis about when disgorgement should be applied, because most of its appealed decisions wind up in either the Ninth or Second Circuit Court. “The question presented is recurring and important, and this case is a suitable vehicle for resolving the conflict,” wrote the SEC in its December 2025 brief to the Supreme Court. Without a ruling from the high court, defendants, courts, and the SEC will be left with what Sripetch called an intolerable conflict. “Defendants will have no clue whether to resist a disgorgement demand or settle. Courts will be left to guess whether the SEC is required to show pecuniary harm or not,” wrote the law firms of Brown White & Osborn and Haynes Boone representing Sripetch in their October 2025 brief to the Supreme Court. “And the SEC will have to set priorities and devise litigation strategies without knowing the baseline governing its centerpiece enforcement action.”
Compliance Challenge
Should the high court decide to either not rule on or to uphold the Ninth Circuit’s decision involving Sripetch, compliance directors will need to pay closer attention to preventing certain types of violations of securities laws. That is because it will be easier for the SEC to ask for compensatory damages for investors. The Commission won’t have to prove they were harmed financially. Insider trading, market manipulation, violations of securities registration rules, and violation of the U.S. Foreign Corrupt Practices Act (FCPA), were cited by several compliance managers who spoke with FinOps Report as being the most worrisome infractions. Enacted in 1977, the FCPA prohibits U.S. citizens and publicly traded companies from bribing foreign government officials or their agents to either obtain new business or to retain existing contracts.
“Insider trading, market manipulation, violations of securities registration rules and violation of FCPA are typically considered victimless crimes, so it would be impossible to determine which investors should receive the funds from disgorgement,” explained one compliance director at an East Coast brokerage firm who spoke on condition of anonymity. “We have to be as proactive as possible now in mitigating all wrongdoing to prepare for the possibility that the Ninth Circuit’s opinion will be upheld one way or another.” Another compliance director at another East Coast brokerage asserted that regardless of the Supreme Court’s decision, disgorgement is here to stay because it provides the SEC with a strong bargaining chip against defendants. “Continued vigilance is essential,” he said. “Disgorgement should still be viewed as a high regulatory risk.”
The consensus among the compliance managers contacted by FinOps Report is that ideally the Supreme Court should decide when disgorgement applies, how it should be calculated, and where the funds should be sent if harmed investors can’t be located. “What’s the point of disgorgement if the funds end up with the Treasury instead of investors,” bemoaned one compliance manager. “Since disgorgement is typically considered to be net profits after legitimate expenses audit directors will have to spend more time ensuring that all expenses are calculated and recorded correctly in accounting logs to avoid the SEC disputing their estimates.” The current practice for determining net profit in cases involving disgorgement typically requires lengthy negotiation between the SEC and a firm’s legal counsel to find an acceptable figure.
In his amicus brief to the Supreme Court, Sripetch argued that the SEC in his case did not show how individual investors were harmed by his actions. Therefore, no disgorgement should have been awarded. According to the Commission, from 2013 through 2019, Sripetch and other defendants ran fraudulent pump and dump schemes on about 20 penny stock in which they purchased microcap stocks and artificially boosted their prices temporarily. Sripetch initially consented to the judgment made by the U.S. District Court for the Southern District of California that he would pay the SEC the SEC USD$2,251,923.16 in the net profits he had unlawfully received, plus more than USD$1 million in prejudgment interest. However, he subsequently appealed that decision to the Ninth Circuit. (The other defendants settled with the SEC).
In its ruling on Sripetch’s appeal, the Ninth Circuit last year repeatedly criticized the Second Circuit Court of Appeals’ contradictory stance in its October 31, 2023, decision in the case of the SEC v. Govil for two key reasons. The first was that the Second Circuit’s ruling violated the principles of common law by ignoring the difference between compensatory damages and restitution. Compensatory damages are required to pay back a victim for financial loss while restitution is about depriving the criminal of illegal profits. Common law dictates that the claimants — or investors — are entitled to restitution. The second interrelated reason cited by the Ninth Circuit was that the Second Circuit erroneously presumed that a “victim” is only someone who is financially harmed. Instead, said the Ninth Circuit, a “victim” for disgorgement purposes is anyone who has suffered an “interference” of their “legally protected rights.”
Turning Point
The conflict among the federal circuit courts follows a June 22, 2020 decision made by the Supreme Court in the case of Liu v. SEC which apparently left too much to interpretation. Although the Sarbanes-Oxley Act of 2002 gave the SEC the ability to seek “equitable relief” in civil enforcement actions, it was not until the Liu case in 2020 that the Supreme Court clarified that disgorgement could be used to satisfy the standard of “equitable relief ” under two conditions. In a majority decision written by Justice Sonia Sotomayor, the Supreme Court said that awards must be limited to the “net profit” of a wrongdoer, after “legitimate business expenses” are deducted, and they must be “awarded for victims.” Under this reasoning, the SEC arguably cannot ask for disgorgement unless investors are financially harmed.
However, in agreeing with the First Circuit’s position on disgorgement when ruling against Stripetch, the Ninth Circuit said that “Liu makes it clear that equitable principles are served neither by returning to victims more than they lost nor by depositing undistributed government funds in the U.S. Treasury.” As the sole dissenter to the majority decision in 2020, Justice Clarence Thomas also countered that the high court had not provided sufficient guidance on how to apply Liu’s two constraints, particularly when it comes to the requirement that “equitable relief” be used for the benefit of investors. Even if disgorgement is applied, the SEC only has to “generally compensate” victims, according to Justice Thomas. Such a stance, he explained was “inconsistent with traditional equitable principles.” What’s more, the majority decision did not clearly explain what should happen to any money the SEC acquires through disgorgement if it could not be returned to investors. Being sent to the U.S. Treasury as a default remedy isn’t exactly fair, he argued. “The money ordered to be paid as disgorgement in no sense belongs to the government, and the majority cites no authority allowing a government agency to keep equitable relief for a wrong done to a third party,” wrote Justice Thomas. “Even if the government may sometimes keep the money, the Court should explain when and not ask lower courts to improvise a solution.”
If the Supreme Court’s decision in the case of Liu v. SEC didn’t provide federal circuit courts with sufficient clarity, Congress may have made matters even worse. In 2021, it amended the Exchange Act of 1934 to explicitly authorize the SEC to seek disgorgement by adding Section 21(d)7 without providing helpful clarifications. “The presumption made by some is that Congress overrode the Supreme Court’s decision in Liu v SEC, but that isn’t necessarily the case,” explained Christopher Bosch, an attorney with Sheppard Mullin in New York. “Congress did not redefine disgorgement or address the Supreme Court’s holding that it must be restrained by certain equitable principles, including that it must be awarded for victims.” Therefore, he explained, the door was left open to further interpretation of what the SEC might do.
Sripetch’s Supporters
Among all of the briefs sent to the Supreme Court supporting Sripetch’s stance, the Cato Institute’s was the most scathing in criticizing the Ninth Circuit’s decision and the SEC’s overreach. In its letter dated November 17, 2005, the organization argued that the SEC’s ability to seek disgorgement without proving financial harm to investors lends itself to an abuse of power to meet a political agenda. The SEC is biased, despite its claim to the contrary. Although the regulatory agency’s commissioners have fixed five-year terms, they are presidential appointees. “Interpreting disgorgement broadly encourages the SEC to seek one disgorgement remedy for one defendant favored by the administration, and another, more onerous penalty for someone disfavored,” wrote the law firm of Smith, Anderson, Blount, Mitchell & Jernigan representing the Cato Institute, a Washington, DC-based nonprofit libertarian think tank. “Enforcement of the law should not depend on the political whims of the White House or the SEC majority.”
In its amicus brief supporting Sripetch dated November 15, 2025, CaLALTs argued that if the Supreme Court sides with the Ninth Circuit, the growth of innovative asset classes, such as cryptoassets, or certain types of credit, would be stifled. The reason — registration violations almost never cause any harm to investors. However, based on the rulings of the First and Ninth Circuits defendants would have to unjustly give up their entire compensation. “To offer novel investment opportunities to investors investment promoters and managers acting in good faith must rely on legal advice to interpret the securities laws while accepting a certain amount of legal risk,” wrote the law firm of Waymaker LLP representing CaLALTs, a San Francisco-based nonprofit promoting the California alternative investment industry. “Permitting courts to impose disgorgement awards, without showing that the violations caused pecuniary harm to any victims, would greatly compound such risks, disincentivizing individuals and entities from participating in the alternative investment industry.” Yet another reason CaLATS offered for overturning the Ninth Circuit’s decision is that its definition of “victim” leads to two unanswered questions. “The Court did not explain what an actionable interference or legally protected interest means, and how such an interference relates to whether a defendant’s gains were ill-gotten,” wrote Waymaker. “Further, the Ninth Circuit does not explain how, if there are no victims who suffered pecuniary harm, a court should determine how much of a defendant’s profits were ill-gotten.”
In their amicus brief dated November 17, 2025, ICAN and the law firm of Paul Hastings also disputed what they called the “inequities” of the Ninth Circuit’s decision in the case involving the SEC v Barry, which paralleled its ruling in the case of the SEC v. Sripetch. “It [the Barry decision] allows the SEC to extract windfall penalties disguised as equity, even where no investors are left unwhole and no causal nexus exists between the violation and any gains,” they wrote. “By allowing investors who suffered no pecuniary harm to receive the proceeds of disgorgement, the Ninth Circuit is transforming disgorgement into a punitive measure which contradicts the intent of the Supreme Court’s ruling in the case of Liu v. SEC.” In addition to requiring that the SEC prove financial harm to investors before imposing disgorgement, the Supreme Court should clarify that “time value of money” not be considered financial harm, explained ICAN and Paul Hastings. As a nonprofit public interest litigation firm, ICAN advocates on behalf of small investors against the SEC’s overreach.
Regardless of whether the Supreme Court overturns the Ninth Circuit’s decision, one thing is certain caution. Unless the highest court specifically addresses what the SEC should do when it cannot identify harmed investors, one of three outcomes will occur, cautioned legal experts. Either the SEC will not be able to justify disgorgement as a remedy; it will increase civil penalties to compensate for the lack of disgorgement; or it will continue to forward funds from disgorgement to the U.S. Treasury. It is unclear how any of those results help compensate investors. If Supreme Court decides to require the SEC to make an effort finding impacted parties financial firms would carry much of the operational burden. “Compliance directors should ensure excellent recordkeeping, as the SEC may request customer information to identify potentially affected investors,” recommended Sheppard Mullin’s Bosch. “This information is typically gathered from customer records retained on company systems and produced in consultation with legal counsel.” He cautioned that when the requested information relates to foreign customers compliance directors work closely with legal counsel to ensure that the documents or data are gathered, reviewed, and produced in compliance with foreign privacy laws.
Until the Supreme Court has the final say on when and how the SEC can apply disgorgement, Wall Street compliance directors will need to do their utmost to not to find themselves in the Commission’s crosshairs. Heartache and confusion are the only likely outcomes.
KentourisC@gmail.com
917.510.3226
#AmicusBriefs #CaliforniaAlternativeInvestmentsAssociation #BrokerageOperations #CatoInstitute #ChiefComplianceOfficers #CCOs #Disgorgement #federalappealscourts #FirstCircuitCourtofAppeals #FundOperations #InvestmentOperations #InvestorChoiceAdvocatesNetwork #Investors #JusticeClarenceThomas #JusticeSoniaSotomayor #LiuvSEC #PaulHastings #NinthCircuitCourtofAppeals #SecuritiesandExchangeCommission #SEC #SECvSripetch #WaymakerLLP
Leave a Comment
You must be logged in to post a comment.