The U.S. Supreme Court’s recent unanimous decision in Sripetch v. Securities and Exchange Commission is an important victory for the enforcement of securities laws, as well as for whistleblowers whose tips help drive many significant SEC enforcement actions. In a 9-0 opinion authored by Justice Neil Gorsuch, the Court held that the SEC may obtain disgorgement — a remedy focused on preventing unjust enrichment by requiring defendants to give up profits derived from unlawful conduct — without proving that investors suffered a measurable financial loss. The ruling resolves a circuit split and rejects an effort to impose a new limitation on the SEC’s enforcement remedies.
Case Background
The case arose from a series of fraudulent penny-stock schemes orchestrated by Ongkaruck Sripetch. Sripetch manipulated the stock prices of at least twenty publicly traded companies through deceptive trading practices and fraudulent promotional activity. After bringing a civil enforcement action, the SEC obtained a judgment against Sripetch and sought over $4.1 million in disgorgement of profits derived from the misconduct. Sripetch did not dispute the principle that the SEC could seek disgorgement but argued that disgorgement could be awarded only when it functioned as compensation for identifiable economic harm and the SEC had not proved pecuniary loss. The Supreme Court unanimously rejected that argument.
The Road to Sripetch
For decades, the SEC routinely sought disgorgement in enforcement actions. Although Federal courts regularly awarded disgorgement, the remedy was not expressly authorized by statute but instead was developed through Federal courts’ equitable powers.
In 2017, this framework came under scrutiny when the Supreme Court decided Kokesh v. SEC. In Kokesh, the Court unanimously held that SEC disgorgement constitutes a “penalty” for purposes of the Federal statute of limitations. Because penalties are subject to a five-year limitations period, the SEC could not seek disgorgement based on older conduct. While Kokesh did not directly address whether disgorgement was available at all, the decision generated significant uncertainty because if disgorgement was a penalty, then its characterization as an equitable remedy could be called into question.
The issue returned to the Court in 2020 in Liu v. SEC. In Liu, the defendants argued that Federal courts lacked authority to award disgorgement because the remedy operated as a punitive sanction rather than traditional equitable relief. The Court rejected that broad challenge but imposed important limitations. Writing for the majority, Justice Sotomayor concluded that disgorgement may qualify as equitable relief when it adheres to traditional principles of equity and restitution. Among other things, Liu held that:
- Disgorgement generally should be limited to a defendant’s net profits rather than gross receipts;
- Legitimate business expenses ordinarily must be deducted;
- The remedy should generally benefit victims; and
- Federal courts must ensure that disgorgement does not become a punitive sanction.
Congress subsequently amended the securities laws through the National Defense Authorization Act for Fiscal Year 2021, expressly authorizing the SEC to seek disgorgement in Federal court. Those amendments largely resolved questions about statutory authority but left unanswered questions about the precise contours of the remedy and the continuing role of traditional equitable principles. This uncertainty set the stage for Sripetch.
The Court’s Reasoning
Sripetch relied heavily on Liu, arguing that because the Court described disgorgement as a restorative remedy, the SEC should be required to prove that investors suffered measurable economic harm before obtaining disgorgement. The Court disagreed, explaining that Sripetch’s argument misunderstood both Liu and the historical foundations of equitable restitution.
The Court emphasized that disgorgement is designed to prevent wrongdoers from retaining profits obtained through unlawful conduct. Drawing on centuries of equity jurisprudence, Justice Gorsuch explained that a defendant can be unjustly enriched even when a plaintiff cannot prove a corresponding financial loss. The Court observed that equity frequently focuses on the defendant’s wrongful gain rather than the victim’s economic injury. Equity, the Court explained, has traditionally favored restoring the status quo that existed before the defendant acquired the illicit gains.
The Court also relied on the Restatement (Third) of Restitution and Unjust Enrichment, which recognizes that disgorgement may be appropriate when a defendant interferes with legally protected interests and obtains profits through wrongful conduct. Importantly, the Court did not retreat from the limitations established in Liu. The opinion repeatedly emphasized that disgorgement remains subject to traditional equitable constraints and must continue to operate as a remedy for unjust enrichment rather than punishment.
Why the Decision Matters
SEC enforcement actions, including those involving insider trading, market manipulation, and Ponzi schemes, involve conduct that distorts markets, deprives investors of truthful information, or otherwise undermines the integrity of the securities markets. In some circumstances, however, proving the precise amount of investor loss can be difficult even where the defendant plainly profited from misconduct. By reaffirming that disgorgement is principally concerned with unjust enrichment, the decision preserves an important mechanism for ensuring that securities fraud does not pay.
That also has important implications for whistleblowers. SEC whistleblower awards are based on monetary sanctions collected in successful enforcement actions. Although Sripetch does not directly address whistleblower awards, preserving disgorgement helps maintain a significant component of the SEC’s enforcement arsenal and, in appropriate cases, may contribute to the monetary recoveries from which whistleblower awards are calculated.
Future Challenges
Although the Court unanimously agreed on the outcome, Justice Clarence Thomas wrote separately to identify what may become the next major battleground in SEC enforcement litigation. Justice Thomas argued that the Court merely assumed — without deciding — that disgorgement remains an equitable remedy. In his view, Congress’ 2021 amendments to the securities laws may have fundamentally altered that analysis. Justice Thomas noted that Congress expressly authorized the SEC to seek both “equitable relief” and “disgorgement” in separate statutory provisions, which raises the possibility that disgorgement should no longer be viewed as equitable relief at all. That distinction is significant because legal remedies generally trigger the Seventh Amendment right to a jury trial. Future litigants are likely to take up this issue.
If you know of possible violations of securities laws and would like to speak to an experienced whistleblower attorney, contact Phillips & Cohen for a confidential review of your case. Phillips & Cohen is the most successful law firm representing whistleblowers, with recoveries from cases totaling over $13 billion. Phillips & Cohen clients have received numerous awards under the SEC and CFTC whistleblower reward programs created by the Dodd-Frank statute and its attorneys have decades of experience representing whistleblowers under the Dodd-Frank Whistleblower Programs and other whistleblower programs.
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