08 Oct The Securities and Exchange Commission’s Disgorgement Powers After Liu: BWO Enters the Fray
In a significant development for securities enforcement, Brown White & Osborn recently argued a case before the Ninth Circuit that has profound implications for businesses on the West Coast. In SEC v. Sripetch, the Court was asked to answer the question of whether the Securities and Exchange Commission (“SEC”) must first prove investors suffered actual economic harm before a defendant can be ordered to disgorge their ill-gotten profits. This issue has split the two other circuits that have considered the question.
When the Supreme Court placed limits on the SEC’s ability to obtain disgorgement in its 2020 Liu v. SEC decision (140 S.Ct. 1936), many practitioners believed the case would significantly diminish the SEC’s capability to seek and obtain significant disgorgement orders in civil enforcement actions. However, the reality is that the Liu decision has had no significant effect on disgorgement awards, as most courts continue to provide the SEC with considerable deference in their disgorgement calculations.
Disgorgement has become the default remedy for the SEC. Typically, the SEC aggressively calculates disgorgement while leaving the defendant with the burden of demonstrating that the calculation is unreasonable. This approach gives the SEC significant leverage to dictate what it deems can and cannot be offset against disgorgement. Moreover, this approach permits the SEC to circumvent the Court’s explicit holding in Liu that “a remedy grounded in equity must, absent other indication, be deemed to contain the limitations upon its availability that equity typically imposes.” Liu at 1947.
However, Liu left an open question: whether the SEC must show investors were harmed before obtaining a disgorgement award. The issue has split the two other circuits that have considered it. In SEC v. Govil, 86 F. 4th 89, (2023), the Second Circuit determined that the SEC was required to show investor financial harm before a disgorgement order could be entered. However, a year later, in SEC v. Navellier & Associates, Inc., 108 F.4th 19, (2024) the First Circuit held that the SEC was not required to show investor harm.
BWO argued on behalf of its client, Mr. Sripetch, that the Second Circuit’s approach was correct and that the SEC must show investor harm. The Ninth Circuit upheld a $2.25 million disgorgement award plus interest against Mr. Sripetch, adopting the First Circuit’s ruling and holding that the SEC need not prove that investors suffered actual financial losses before reclaiming a defendant’s profits.
The Commission had charged Sripetch and others with manipulating penny stock schemes. While BWO argued that disgorgement requires evidence of investor “pecuniary harm,” the SEC prevailed by emphasizing that the remedy exists to strip wrongdoers of ill-gotten gains, not to measure investor damages. The court explicitly sided with the First Circuit’s 2024 decision in Navellier. It rejected the Second Circuit’s contrary 2023 ruling in Govil, creating a high-stakes circuit split that may ultimately require Supreme Court review.
This decision represents a significant development in SEC enforcement jurisprudence. It establishes that within the Ninth Circuit, the Commission may pursue disgorgement remedies without the burden of proving actual investor losses—a ruling that substantially enhances the SEC’s enforcement capabilities throughout the Western United States.
Tyler Creekmore