Justices Appear Skeptical of Investor-Harm Requirement in Sripetch SEC Disgorgement Case

Key Takeaways

• On April 20, 2026, the Supreme Court heard oral arguments in Sripetch v. SEC, a case in which the justices will answer whether the Securities and Exchange Commission (SEC or the Commission) must prove pecuniary harm to investors before a court can order disgorgement.¹ A ruling is expected by July 2026.
• The justices appeared skeptical of Petitioner Sripetch’s position that the purpose of disgorgement is not to strip the defendant of ill-gotten gains but rather to return funds to harmed investors who have a legal entitlement to the funds.
• The outcome could significantly affect the SEC’s ability to seek disgorgement as the SEC under the Petitioner’s argument would be required to prove (1) the specific individual(s) who were harmed, (2) the monetary amount of harm to those individuals, and (3) the defendant’s violation caused the harm.

Background

In the initial Southern District of California case, Defendant Sripetch consented to a final judgment for violations of the securities laws and agreed that the District Court could order disgorgement.² Without requiring a showing of pecuniary harm, the court ordered Sriptech to disgorge roughly $2.25 million, plus over $1 million in prejudgment interest based on his ill-gotten gains.³ The Ninth Circuit upheld the ruling.⁴

Previously, the First Circuit held that pecuniary harm need not be shown for the court to order disgorgement.⁵ The Second Circuit, however, had ruled that proof of investor’s pecuniary harm was required for the court to order disgorgement.⁶

Traditionally, courts ordered defendants to disgorge ill-gotten gains without requiring proof of pecuniary harm.⁷ The Fifth Circuit has noted that the securities laws, as amended, ratify “the pre-Liu disgorgement framework used by every circuit court of appeals,” which focused on approximating the defendant’s unjust enrichment rather than quantifying or requiring proof of investor losses.⁸

In the 2020 case Liu v. SEC, the Supreme Court analyzed the SEC’s ability to seek disgorgement under Section 21(d)(5) of the Securities Exchange Act,⁹ i.e., as an equitable remedy “for the benefit of investors.”¹⁰ Section 21(d)(5) authorizes the SEC to “seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors.” The Liu Court found that disgorgement can be wielded as an equitable remedy under Section 21(d)(5) if it is restricted “to an individual wrongdoer’s net profits to be awarded for victims.”¹¹ In dicta, the Court further explained that lower courts can consider if the SEC “fails to return funds to victims, it imposes joint-and-several liability, [or] it declines to deduct business expenses from the award” to determine if disgorgement is being applied as a penalty rather than as an equitable remedy. To explain why “failing to return funds to victims” may indicate disgorgement is being used as a penalty, the Court looked to traditional equity practice and analyzed the phrase “may be appropriate or necessary for the benefit of investors.”¹²

Liu left open several questions, among them: does the requirement that disgorgement “be awarded for victims”¹³ mean that courts must find the SEC proved pecuniary harm to investors prior to ordering disgorgement?¹⁴

In less than one year after the Liu decision, Congress enacted Section 21(d)(7) of the Securities Exchange Act¹⁵ in 2021. This provision explicitly authorizes the SEC to seek and federal courts to order disgorgement “[i]n any action or proceeding brought by the Commission under any provision of the securities laws.” Notably, this new provision omits the phrase “for the benefit of investors.”

The Parties’ Positions

Petitioner Sripetch argued equity has traditionally limited disgorgement to provable harm to investors. He asserted the SEC’s interpretation of the remedy — recovery of ill-gotten gains without proof of pecuniary harm — transforms it into a civil penalty. He also argued that Congress did not intend for disgorgement to be a civil penalty because it was not included in the provision for civil penalties in Section 21(d)(3). Citing Jarkesy,¹⁶ Petitioner also contended that the SEC’s broader definition of disgorgement would allow it to avoid jury trials in violation of defendant’s rights under the Seventh Amendment.

The SEC argued it has authority to seek disgorgement under Section 21(d)(3)(a)(2) and (d)(7), or (d)(5), and that disgorgement is tied to the defendant’s net ill-gotten gains — not to investor losses. The SEC seemed to concede that reliance on Section 21(d)(5) was its weaker argument but noted that the Court left open in Liu whether the SEC could seek disgorgement when profits cannot be practically distributed to investors.¹⁷ The SEC did not address Jarkesy in its briefs and, when pressed, asserted Jarkesy was inapplicable to this case as it was heard in an Article III court and did not involve a civil penalty.

Signals From the Bench

The justices seem to understand the enactment of Section 21(d)(7) constituted a significant addition to the SEC’s quiver of remedies. Justice Thomas said the world had changed since Liu and noted that, before the statutory amendments, he viewed disgorgement as “homeless,” referring to his dissent in Liu arguing that disgorgement is not an equitable remedy.¹⁸ Justice Sotomayor questioned why she had spent time analyzing the phrase “for the benefit of investors” in Liu if such language were implicit in the definition of disgorgement.¹⁹ Justice Barrett pushed the Petitioner to explain how he could win without relying on Liu.

Justices Kagan and Sotomayor seemed to be concerned about the implications of the SEC discounting its Section 21(d)(5) argument. While the easiest path to victory for the SEC might be through Section 21(d)(7), abandoning the argument that Section 21(d)(5) authorizes disgorgement of gains without pecuniary harm could potentially strengthen arguments that disgorgement is not equitable — or, at least, disgorgement as used by the SEC is a civil penalty. If disgorgement were found to be a civil penalty, the SEC might be forced to submit to a jury trial each time it litigated its right to disgorgement. Such a requirement could impose a significant additional burden on the Commission, potentially reducing its leverage in settlement discussions and could result in more defendants avoiding liability for disgorgement.

The justices also seemed to push back on the SEC’s claim that disgorgement could be equitable if the SEC collects funds without any intention of trying to return them to investors, but they also noted that the Court need not resolve that question to resolve this case. The only issue before it in the present case is whether the SEC must prove pecuniary harm to seek disgorgement at all.

A decision is expected by July 2026. Sripetch is unlikely to be the last disgorgement case before the Court as the lower courts continue to test the boundaries of the 2021 statutory amendments.