A Two-to-One Circuit Split: Is An Investor Who Lost Nothing, Owed Something?
The United States Supreme Court recently agreed to adjudicate a case that will resolve a circuit split concerning whether the U.S. Securities and Exchange Commission (“SEC” or “Commission”) must prove harm to investors to secure disgorgement from alleged fraudsters. Disgorgement is a modern label for a profits-based award, paralleling the traditional equitable remedies of restitution. The High Court took up a petition stemming from a Ninth Circuit order in SEC v. Sripetch, 154 F.4th 980 (9th Cir. 2025), cert. granted, No. 25-466, 2026 WL 73091 (U.S. Jan. 9, 2026). The Defendant-Petitioner, Ongkaruck Sripetch, asked the Supreme Court to resolve a two-to-one circuit split over whether the SEC can demand defendants to disgorge their ill-gained profits, even if the Commission fails to prove investors suffered monetary losses as a result of the defendants’ actions. The Ninth Circuit recognized the split when issuing its holding, backing the First Circuit in reasoning that the SEC does not need to show pecuniary harm to victims of fraud when demanding disgorgement from fraudsters. These holdings cut against the Second Circuit’s decision in SEC v. Govil, 86 F.4th 89 (2d Cir. 2023), that reached the opposite conclusion.
Sripetch, who allegedly participated in a $6 million pumpand-dump scheme involving at least 20 different penny stock companies, stated that the circuit split created “intolerable confusion” as to when the SEC can collect disgorgement. By way of background, in 2020, the SEC commenced a civil action in the United States District Court for the Southern District of California (“District Court”), alleging Sripetch violated various provisions of the securities laws. Sripetch asserted that because the SEC failed to identify any harmed investors, no disgorgement should be entered. Without ruling on whether such evidence is required, the District Court ordered Sripetch to disgorge $2.2 million in ill-gotten gains.
The Sripetch action highlights a persisting conflict regarding the SEC’s remedial authority—whether the Commission may seek equitable disgorgement in civil enforcement suits without showing investors suffered pecuniary harm. Setting the stage for the High Court’s review, the Ninth Circuit affirmed the District Court’s holding, finding that “pecuniary harm” is not a statutory precondition to disgorgement. The non-conformity between the circuit courts has left litigants in an “untenable” situation, as the SEC’s remedial authority varies when an enforcement action arises in New York or California. The recurring issue requires Supreme Court intervention, as disgorgement requests are ubiquitous in SEC actions, and there
are now conflicting rules in the two main circuits—the Second and Ninth—where enforcement actions are most prominent. Indeed, much is at stake given the SEC is the beneficiary of billions of dollars in disgorgement each year, absent identifiable harmed investors.
The circuit split opened in the wake of the Supreme Court’s decision in Liu v. SEC, 591 U.S. 71 (2020), in which the justices ruled that the Commission may seek disgorgement so long as the amount awarded does not exceed a wrongdoer’s net profits. The Second and First Circuits have disagreed about whether disgorgement under Sections 78u(d)(5) and (d)(7) of Title 15 of the United States Code—the codification by subject matter of the general and permanent laws of the United States—requires a finding of pecuniary harm. The Ninth Circuit noted that in Liu, the Supreme Court interpreted Section 78u(d)(5)—a federal statute authorizing the SEC to seek equitable relief in civil actions—to also encompass awards of disgorgement. Moreover, the Ninth Circuit observed that post-Liu, Congress implemented Section 78u(d)(7) which expressly authorizes the SEC to seek disgorgement in civil actions enforcing securities laws. When upholding the District Court’s ruling in favor of the disgorgement order against Sripetch, the Ninth Circuit explained that disgorgement is fundamentally grounded in the principle that a person cannot retain their ill-gotten gains. According to the Ninth Circuit, Liu makes clear that disgorgement is governed by traditional equity practices and under these principles, a showing of pecuniary harm is not required. However, relying on the Second Circuit, Sripetch argues that Liu highlights that disgorgement is about returning funds to victims of fraud, and “an investor who lost nothing is owed nothing.” But victims are not always easy to identify, which adds another piece to the disgorgement puzzle. For example, in pump-and-dump cases such as the one against Sripetch, there can be thousands of investors who bought or sold securities in a manipulated market. These investors can be “virtually impossible” or “cost-prohibitive” to identify.
The SEC has historically treated disgorgement as a vehicle to recoup the illicit gains received by the perpetrator of an alleged fraud. However, Sripetch argues that the remedy is validated by important checks and balances: to avoid transforming an equitable remedy into a punitive sanction, courts restrict discouragement to an individual wrongdoer’s net profits when making such an award to victims. Under that rule, a wrongdoer cannot be punished by paying more than fair compensation to the person wronged. From Sripetch’s view, the Ninth Circuit has deployed disgorgement as a sanction for wrongdoers; investors that were harmed are simply an afterthought.
As explained above, the issues presented in the Sripetch action are ripe for review and have overarching effects on public policy. According to the Cato Institute, not only does the circuit split create confusion, but the Ninth Circuit’s ruling broadly interprets disgorgement and unlawfully delegates legislative power to executive officials. Moreover, the Sripetch decision arguably upsets constitutional separation of powers and violates due-process rights while providing the Commission with an “overboard assertion of legal authority.” The Supreme Court’s intervention could provide a brightline rule that would prohibit the SEC from selectively enforcing penalties against defendants and then benefiting from those proceeds. Additionally, a ruling in Sripetch’s favor could reduce the monies the Commission recovers from those it alleges violate the securities laws. Disgorgement and prejudgment interest are the centerpiece of the SEC’s multibillion-dollar enforcement arsenal—generating $6.1 billion in financial remedies for fiscal year 2024 alone. However, there is optimism that the SEC could prevail before the High Court. The facts of the case could lean in the SEC’s favor given that, in a parallel criminal case, Sripetch was sentenced to 21 months in prison after pleading guilty to penny stock fraud in 2022. The Supreme Court is essentially being asked to decide whether Sripetch should be allowed to keep the ill-gotten proceeds of his criminal enterprise. This fact may weigh in favor of the Commission, as ruling in Sripetch’s favor rubs against ethical logic.
Absent a brightline rule via Supreme Court intervention, one thing is for certain—future circuits would be left to pick sides, while litigants wonder whether disgorgement is available in routine SEC enforcement actions. Time will tell…