Disagreeing with the Second Circuit, the Ninth Circuit Holds That the SEC Can Obtain Disgorgement Without Having to Prove Victim Losses

A Ninth Circuit panel affirmed a disgorgement award against Ongkaruck Sripetch, rejecting his arguments that the remedy was improper because the SEC had not shown that there was pecuniary harm. In so doing, the panel explicitly rejected the Second Circuit’s contrary holding in SEC v. Govil, 86 F.4th 89 (2d Cir. 2023), deepening a circuit split that may ultimately result in the Supreme Court addressing the SEC’s disgorgement remedy for a third time in a decade.

The Winding Road of SEC Disgorgement

Disgorgement as an SEC remedy traces back to the 1970s when courts first began ordering defendants to surrender ill-gotten gains as an equitable remedy despite the absence of explicit statutory authorization. In 2002, Congress enacted Section 21(d)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) (15 U.S.C. § 78u(d)(5)) granting the SEC authority to seek “any equitable relief” in enforcement actions.

Over a decade later, the Supreme Court unanimously held in Kokesh v. SEC, 581 U.S. 455 (2017), that disgorgement operated as a penalty and was, therefore, subject to a five-year statute of limitations under 28 U.S.C. § 2462. The Court also left open the opportunity for other challenges to the remedy, stating in a footnote: “Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.” 581 U.S. at 461, n.3.

A few years later, in Liu v. SEC, 591 U.S. 71 (2020), the Court held that courts could order disgorgement but narrowed earlier lower-court rulings by (1) reiterating that disgorgement, as equitable relief, must be limited to a wrongdoer’s net profits and (2) explaining that, where practicable, funds should be returned to “victims” rather than deposited into the Treasury. 591 U.S. at 88-89, 91-92.

The following year, in response to Kokesh and Liu, Congress added Section 21(d)(7) of the Exchange Act (15 U.S.C. § 78u(d)(7)), which expressly provided the SEC with the disgorgement remedy and lengthened the statute of limitations for the SEC to obtain that relief for certain types of conduct. That legislation has generated a new wave of disputes about whether the statute broadened or preserved Liu’s constraints. The result of Liu and § 78u(d)(7) has been a patchwork of competing interpretations about the scope of disgorgement. In Sripetch, the Ninth Circuit adds its own patch.

The Ninth Circuit’s Decision

Sripetch argued that under Liu, proof of investor losses was a prerequisite for disgorgement. The Ninth Circuit rejected that argument and held that the SEC need not prove that investors suffered pecuniary loss to qualify as “victims” for purposes of disgorgement. Relying heavily on the Restatement and common-law restitution, the Court reasoned that a person whose legally protected interest was invaded can be a “victim” entitled to disgorgement proceeds, even if that person did not lose money. Although Section 21(d)(5) authorizes courts to order “any equitable relief that may be appropriate or necessary for the benefit of investors,” the Ninth Circuit cast disgorgement as a remedy to deprive the wrongdoers of their unjust profit, without consideration of any quantifiable loss by the victim.

How the Ninth Circuit Diverges from the Second Circuit

The Ninth Circuit’s expansive view stands in sharp contrast to the Second Circuit’s 2023 decision in Govil, which treated the investor-restoration discussion of Liu as the touchstone of whether disgorgement is appropriate. The Second Circuit interpreted Liu’s command that disgorgement be “awarded for victims” to require a showing that investors suffered pecuniary harm before disgorged funds may be disbursed for their benefit. Govil, 86 F.4th at 99. The Second Circuit concluded that the “awarded for victims” language in Liu cannot be read out of the remedy and that a court must therefore find pecuniary harm before ordering disgorgement for the benefit of investors. Id. at 106.

In contrast, the Ninth Circuit’s approach in Sripetch broadens the concept of “victim” to anyone with an invaded legal interest, downplaying Liu’s focus on investor restitution. Critics will note that this formulation does not fully account for Liu’s ostensible corrective purpose: to restrain years of expansive disgorgement practices that sometimes produced results indistinguishable from penalties or broad compensatory awards.

The Developing Split and What Comes Next

In rejecting a pecuniary harm requirement, the Ninth Circuit aligns itself with the First Circuit (which, in SEC v. Navellier, 108 F.4th 19 (1st Cir. 2024), declined to follow Govil) and deepens the existing circuit split on disgorgement.

With similarly situated defendants facing materially different outcomes depending on the jurisdiction in which their cases arise (usually chosen by the SEC), the Supreme Court may once again need to address the SEC’s disgorgement remedy.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Sharon M. Bunzel, an O’Melveny partner licensed to practice law in California; Jorge deNeve, an O'Melveny partner licensed to practice law in California; Andrew J. Geist, an O’Melveny partner licensed to practice law in New York; Mia N. Gonzalez, an O’Melveny partner licensed to practice law in New York; and Michele W. Layne, an O’Melveny of counsel licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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