Eric Martin | Must the SEC Demonstrate Financial Harm to Identifiable Investors to Support a Disgorgement Award?
Background
Between August 2013 and December 2017, securities trader Ongkaruck Sripetch orchestrated a series of pump-and-dump schemes involving at least twenty penny-stock companies, a form of fraud in which insiders inflate a stock’s price before selling to buyers at the peak. Working with a network of co-conspirators, Sripetch artificially inflated stock prices and sold shares to unwitting investors, pocketing over $2.25 million in illicit profits.
In response, the Securities Exchange Commission (SEC) brought a civil enforcement action, and the U.S. District Court for the Southern District of California ordered Sripetch to disgorge, or surrender to the court, $2,251,923 in profits plus $1,051,353 in prejudgment interest. The fraud was undisputed, but on appeal, Sripetch raised a question that has divided the federal circuits: can the SEC obtain disgorgement when it has not shown that any specific investor suffered financial harm?
The answer depends on how courts read a six-year-old Supreme Court decision and a statute Congress enacted in its wake. In Liu v. SEC, 591 U.S. 71 (2020), the Court held eight to one that disgorgement in SEC enforcement actions must qualify as “equitable relief” consistent with the historical equity practice that existed when the relevant statute was enacted. The Court imposed two limits: (1) disgorgement must not exceed the wrongdoer’s net profits, and (2) it must be awarded “for victims.” However, Liu explicitly declined to resolve whether proof of pecuniary harm, meaning measurable financial loss, to specific investors is a prerequisite to ordering disgorgement.
That open question now divides the circuits, and billions of dollars in annual enforcement recoveries turn on the answer. Between fiscal years 2020 and 2024, the SEC obtained an average of approximately $3.54 billion per year in disgorgement and prejudgment interest, according to the SEC Division of Enforcement’s annual reports for those fiscal years. Yet in fiscal year 2025, disgorgement and prejudgment interest in public company actions collapsed to $108 million, the lowest since tracking began in fiscal year 2010 (Cornerstone Research & NYU School of Law SEED Database, SEC Enforcement Activity: Public Companies and Subsidiaries—FY 2025 Update (Nov. 2025)).
One year after Liu, Congress weighed in. The National Defense Authorization Act (NDAA) for Fiscal Year 2021 added 15 U.S.C. § 78u(d)(7), providing that “[i]n any action or proceeding brought by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may order, disgorgement.” Before this codification, courts treated disgorgement as an exercise of equitable authority under 15 U.S.C. § 78u(d)(5), which authorizes “any equitable relief that may be appropriate or necessary for the benefit of investors.” Beneath this question of investor harm lies a deeper structural problem: whether Congress’s decision to codify disgorgement as a freestanding statutory remedy displaced the equitable constraints Liu imposed, or whether those constraints travel with the remedy regardless of its statutory source. That question is closer than either side of the split admits, because neither Liu’s text nor the NDAA’s legislative history conclusively resolves it. The Supreme Court has agreed to resolve the underlying split this Term in Sripetch v. SEC, No. 25-466, with oral argument set for April 20, 2026.
Issue
Must the SEC demonstrate that identifiable investors suffered pecuniary harm before a federal court may award disgorgement in a civil enforcement action?
The Split
Second Circuit
The Second Circuit stands alone among the circuits to have addressed this question in requiring the SEC to prove investor harm as a condition of disgorgement. In SEC v. Govil, 86 F.4th 89 (2d Cir. 2023), the court considered the SEC’s action against Saagar Govil, who diverted more than $7.3 million from Cemtrex securities offerings into personal accounts. The Second Circuit held that disgorgement is an equitable remedy rooted in restitution, and that traditional equity principles require a nexus between the wrongdoer’s ill-gotten gains and identifiable victim harm. Without a showing that specific investors suffered actual financial loss, disgorgement ceases to serve a remedial function and instead operates as a penalty, exceeding what Congress authorized. The court read Liu’s instruction that disgorgement must be awarded “for victims” as a substantive evidentiary requirement. The Second Circuit acknowledged § 78u(d)(7) but held that both provisions “must comport with traditional equitable limitations as recognized in Liu.” On this reading, the codification changed the source of authority but not the equitable constraints that govern the remedy.
The Second Circuit’s deeper concern is structural: if disgorgement requires no showing of victim harm, what distinguishes it from a civil penalty? Following Liu, disgorgement is remedial because it deprives the wrongdoer of unjust gains rather than imposing an additional cost; penalties are punitive because they exact a sum beyond what the wrongdoer obtained. In practice, the distinction determines whether the SEC is reclaiming what the wrongdoer took or imposing an additional financial punishment. Remove the victim, and the remedial justification collapses.
Yet, Govil’s reading of Liu may be doing more work than the text supports. Liu used the “for victims” phrase to constrain the amount of disgorgement (net profits, not gross revenue) and its distribution (to harmed investors rather than the Treasury). It did not use the phrase to establish a threshold eligibility condition requiring the SEC to identify victims before disgorgement can be ordered at all. Govil extrapolated an evidentiary prerequisite from language that, in context, was limiting how much and to whom, not whether.
That distinction, between “for victims” as a distribution constraint and “for victims” as an eligibility requirement, is the heart of the doctrinal disagreement, and the majority circuits’ reading is the more faithful one. Liu’s actual holding addressed joint liability among codefendants and the deduction of legitimate business expenses, not whether victims must be identified before disgorgement becomes available. The practical consequences amplify the analytical stakes because the Southern District of New York (SDNY), where most major securities fraud and insider trading cases arise, sits within the Second Circuit. Under Govil, the SEC faces a significant procedural hurdle in precisely the cases where disgorgement matters most. Consider insider trading on material nonpublic information ahead of a merger announcement. Profits may run to millions, but the universe of affected counterparty traders is vast, and the individual harm to any one of them is nearly impossible to quantify.
First Circuit
The First Circuit rejected this framework directly. In SEC v. Navellier & Assocs., Inc., 108 F.4th 19 (1st Cir. 2024), the court considered the SEC’s action against an investment advisory firm that allegedly earned $22.7 million in fees through fraudulent misrepresentations about its investment strategy’s performance. The First Circuit held that “neither Liu nor First Circuit precedent require investors to suffer pecuniary harm as a precondition to a disgorgement award.” The court characterized disgorgement as a “profit-based measure of unjust enrichment” focused on the wrongdoer’s net unlawful gains, available “in the absence of direct economic loss to the complaining party.” Liu’s reference to awarding disgorgement “for victims” describes the remedy’s general orientation, not an evidentiary gate. Requiring proof of individualized pecuniary harm, the First Circuit reasoned, would immunize defendants whose fraud causes widespread, but individually small losses.
The strongest version of this argument reads “investors” collectively: the investing public benefits from deterrence and market integrity even when no individual victim is singled out. But if disgorgement is justified purely by deterrence, the line between it and a penalty thins, and Liu’s insistence on the remedy’s remedial character becomes harder to maintain. The better framing, and the one that survives Liu’s constraints, is that disgorgement targets the wrongdoer’s gain rather than the victim’s loss; it is a profit-focused remedy, not a harm-focused one, and that distinction preserves its remedial character even when individual victims cannot be identified.
Ninth Circuit
The Ninth Circuit, whose decision is now before the Supreme Court, aligned with the First Circuit and went further in its statutory analysis. In SEC v. Sripetch, 154 F.4th 980 (9th Cir. 2025), the court affirmed the disgorgement order, holding that pecuniary harm to identified investors is not a prerequisite for the remedy. The Ninth Circuit acknowledged its disagreement with Govil and rested its holding on two statutory bases: § 78u(d)(5) for equitable relief and § 78u(d)(7) surrounding the 2021 NDAA’s codification.
Doctrinally and strategically, this dual basis offers the Supreme Court an off-ramp: affirm on the § 78u(d)(7) ground alone, hold that the statutory codification authorizes disgorgement independent of Liu’s equitable constraints, and resolve Sripetch without revisiting the broader equitable framework. But the Court is more likely to reach the equitable question. The question presented is framed in equitable terms, and the Court rarely grants certiorari to resolve a question and then dispose of the case on an alternative ground that the petition did not raise. The statutory ground remains available if the Court prefers incrementalism, but a narrow § 78u(d)(7) ruling would leave the deeper equitable question, the status of “for victims,” for another day.
Fifth Circuit
The Fifth Circuit reached the same result two years before Govil created the split. In SEC v. Hallam, 42 F.4th 316 (5th Cir. 2022), the court rejected the argument that some investors’ lack of financial harm precluded disgorgement. The Fifth Circuit went further than any other circuit in its reading of § 78u(d)(7), drawing on the expressio unius canon to infer meaning from § 78u(d)(7)’s conspicuous omission of the word “equitable” that appears in § 78u(d)(5), and holding that the provision “authorizes disgorgement in a legal, not equitable, sense.” However, that textual inference is not unassailable.
Under the presumption against implied repeals, Congress legislates against the backdrop of existing law, and it frequently codifies judicial doctrines without intending to alter their scope; accordingly, § 78u(d)(7) should be read in light of Liu’s constraints unless Congress clearly indicated otherwise. The 2021 NDAA was primarily a statute-of-limitations fix responding to Kokesh v. SEC, 581 U.S. 455 (2017), not a wholesale rethinking of disgorgement’s equitable character. The omission of “equitable” may reflect drafting economy rather than a deliberate statutory choice. Congress knows how to create freestanding legal remedies when it intends to; the False Claims Act’s treble damages provision, for example, specifies both the measure and the legal character of the remedy in explicit terms. But the chronology remains significant: the Second Circuit’s Govil decision departed from an emerging consensus, not the other way around. The score stands at three circuits to one, a split the Supreme Court will resolve when it hears oral argument in Sripetch on April 20, 2026.
The interpretive fault line across these decisions reduces to a single question of precedential characterization: is Liu’s “for victims” language a holding or dicta? The Second Circuit treats it as a binding limitation; the First, Fifth, and Ninth Circuits treat it as describing the remedy’s general purpose. The § 78u(d)(7) question cuts across this debate entirely, and its logic is worth stating plainly. If “for victims” is dicta, the statutory question may be irrelevant, because disgorgement was authorized under the equitable framework regardless. If “for victims” is a holding, the statutory question becomes determinative, because only § 78u(d)(7) could supply an alternative basis that sidesteps the equitable limitation. In cases where proxy fraud inflates the value of a merger target, or a special purpose acquisition company sponsor’s misrepresentations affect thousands of dispersed retail investors, the answer determines whether disgorgement is available at all.
Looking Forward
How much the Supreme Court’s resolution reshapes securities enforcement depends on whether the Court examines the NDAA’s statutory codification under § 78u(d)(7). A broad ruling on the 2021 NDAA provision would reshape not just the pecuniary-harm question but the entire framework governing disgorgement’s limits, while a narrow ruling under § 78u(d)(5) alone would leave the statutory dimension unresolved. The amici reflect the stakes: Better Markets and restitution law scholars urge the Court to preserve the SEC’s enforcement authority, while the U.S. Chamber of Commerce argues that disgorgement without identified victims exceeds equitable bounds.
The question is whether the pecuniary-harm standard becomes the national rule. If so, the impact extends beyond the dollar amount of disgorgement awards to the SEC’s enforcement leverage itself. The Division of Enforcement already considers circuit law when selecting a forum for filing, and Govil has given defendants in the SDNY a credible basis to argue that disgorgement is simply unavailable in cases involving diffuse market harm, shifting not just settlement amounts but the entire negotiation dynamic.
Under a national pecuniary-harm standard, that dynamic spreads to every circuit. For instance, indemnification provisions in public-company merger agreements typically allocate SEC enforcement risk through a combination of escrow holdbacks, funds set aside at closing to satisfy post-deal liabilities, and Director & Officer insurance tail policies, which cover directors’ and officers’ pre-closing conduct after a transaction closes; when the disgorgement component of that risk drops, the escrow shrinks and the buyer’s post-closing enforcement exposure against former officers narrows, which in turn affects purchase price negotiations. The disruption would be felt not in the SDNY, where Govil is already the law, but in the Fifth and Ninth Circuits, where the SEC has operated under broader disgorgement authority since Hallam and Sripetch. A ruling for the three-circuit majority would cement broad disgorgement authority nationally and eliminate the forum-selection calculus that has complicated SEC enforcement since the split emerged.
The decision arrives at a moment when SEC enforcement is already waning, as the FY2025 data makes clear. Whether the Court resolves the equitable question broadly, affirms on narrow statutory grounds, or charts a middle path, its ruling will determine whether disgorgement, the SEC’s single largest source of monetary recovery, remains available in the cases where it has always mattered most: those involving diffuse harm to investors who may never know they were harmed.
Find Eric on LinkedIn!
