SEC authority on recovering ill-gotten gains faces Supreme Court review

The US Supreme Court is set to hear arguments Monday concerning the Securities and Exchange Commission’s (SEC) ability to extract funds from alleged wrongdoers through a process called “disgorgement.” This dispute could significantly impact a wide range of SEC cases, from record-keeping violations to insider trading allegations.

Background on Disgorgement

Over the past decade, the Supreme Court has already limited the SEC’s ability to use disgorgement three times. Disgorgement is a tool designed to recoup illicit profits and return them to victims. Critics argue the SEC is using it to enrich the Treasury rather than compensate victims, noting that the commission holds over $5 billion in collected disgorgement and penalties that remain undistributed. Supporters maintain disgorgement is vital for investor protection, preventing fraudsters from viewing enforcement actions as a mere cost of doing business. The case also has implications for the SEC’s lawsuit against Elon Musk regarding alleged disclosure violations related to his Twitter stake.

Supreme Court Rulings and Legal Challenges

The Supreme Court ruled in 2017 that the SEC is bound by a five-year statute of limitations when seeking disgorgement. In 2020, the court upheld the SEC’s authority but limited its use, stating awards must be capped at the wrongdoer’s net profits and awarded for victims. A 2024 ruling established a defendant’s constitutional right to a jury trial in federal court when the SEC seeks civil penalties, which are distinct from disgorgement.

The Sripetch Case

The current case, Sripetch v. SEC (25-466), involves Ongkaruck Sripetch, accused by the SEC of fraudulent schemes tied to penny stock companies. Sripetch allegedly used a website, Stockpalooza.com, to promote shares and then sell them, resulting in $6.6 million in illicit profits. A district judge ordered Sripetch to forfeit $3.3 million, a decision upheld by the 9th US Circuit Court of Appeals. Sripetch argues the 2020 Supreme Court ruling requires proof of quantifiable harm to victims before disgorgement can be ordered. The SEC contends that such a requirement is a misinterpretation and that Congress has clarified its broad disgorgement powers.

Broader Implications and SEC Enforcement

The Cato Institute’s Robert A. Levy Center for Constitutional Studies has raised concerns that without limits, the SEC could weaponize its authority. Despite a recent decline in overall SEC enforcement actions and penalties against publicly traded companies, the agency continues to embrace broad disgorgement powers. The Supreme Court is expected to rule on the case by July.