In Securities and Exchange Commission v. Sripetch,1 the U.S. Court of Appeals for the Ninth Circuit affirmed a disgorgement award and determined that the Securities and Exchange Commission (SEC) need not show that investors suffered any pecuniary losses for the SEC to obtain disgorgement as a remedy in a civil enforcement action. The Ninth Circuit’s decision endorsed a broader interpretation of the SEC’s disgorgement powers, aligning with the First Circuit’s decision in SEC v. Navellier and explicitly rejecting the Second Circuit’s ruling in SEC v. Govil, which, as reported in our December 2023 alert, narrowed the SEC’s disgorgement powers to cases in which the SEC can demonstrate that investors suffered pecuniary harm. The court’s opinion deepens a split between the First and Second Circuits, increasing the likelihood that the Supreme Court may be asked to clarify the scope of the SEC’s disgorgement powers and raising the potential for forum shopping.
Litigation Background
The underlying action dates back to 2020, when the SEC brought an enforcement action alleging that defendants, including defendant Ongkaruck Sripetch, jointly engaged in a scheme to manipulate the common stock of nearly 20 companies. The SEC contended that defendants engaged in “stock scalping” by obtaining shares in penny stock companies, promoting the companies’ stock, and then selling the relevant stock at inflated prices caused by the promotions. The SEC alleged that this practice violated the anti-fraud provisions of the securities law by inducing investors to purchase securities at manipulated prices. In September 2023, the District Court entered a consent judgment as to Sripetch, and in April 2024, the court granted in part the SEC’s motion for remedies against Sripetch, including a disgorgement award of approximately $2.25 million plus prejudgment interest. Sripetch opposed the disgorgement award, arguing that the SEC had failed to show that investors were harmed. The District Court acknowledged the split in appellate authority on the question of whether disgorgement was subject to certain equitable limitations, including that investors suffer pecuniary harm. However, the District Court declined to decide that issue, finding that the SEC had sufficiently shown that investors suffered pecuniary harm.
Sripetch appealed the disgorgement award, arguing that the District Court abused its discretion by ordering disgorgement. Sripetch argued that, per the Second Circuit’s decision in SEC v. Govil, disgorgement under 15 U.S.C. §§ 78u(d)(5) and (d)(7) requires a showing of pecuniary harm, and the SEC had failed to make such a showing.
The Ninth Circuit’s Decision
The Ninth Circuit rejected the Second Circuit’s reasoning in Govil andaffirmed the disgorgement award on the ground that the SEC was not required to show that investors suffered pecuniary harm, without reaching the question of whether the SEC had sufficiently made such a showing. While the Ninth Circuit agreed that the Supreme Court’s decision in Liu v. SEC required that disgorgement be “awarded to victims,”2 the panel disagreed that an investor must have suffered pecuniary harm to be considered a victim for disgorgement purposes. First, the Ninth Circuit observed that, under common-law principles of restitution, a claimant seeking disgorgement need only show “an actionable interference by the defendant with the claimant’s legally protected interests,” rather than any loss (pecuniary or otherwise).
Second, the Ninth Circuit determined that in Govil, the Second Circuit had misinterpreted certain language from Liu and the Restatement of Restitution and Unjust Enrichment and improperly analogized private securities actions to SEC civil enforcement actions. In Govil, the Second Circuit had understood Liu‘s observation that disgorgement “restores the status quo” and “returns” a defendant’s gain to investors to mean that a victim’s recovery through disgorgement should be limited to actual, pecuniary losses. The Ninth Circuit disagreed and emphasized that disgorgement is intended to deprive a wrongdoer of ill-gotten gains rather than compensate victims for losses. The Second Circuit had further pointed to private securities actions – which require a showing of economic loss – to conclude that SEC enforcement actions should similarly require a showing of pecuniary loss for disgorgement. The Ninth Circuit rejected this analogy, noting that Congress imposed an economic loss requirement in private securities actions to deter abusive litigation, a concern that was not implicated in SEC enforcement actions.
The Deepening Circuit Split and Looking Ahead
In expressly rejecting the Second Circuit’s reasoning in Govil, the Ninth Circuit aligned itself with the more expansive view of disgorgement set forth by the First Circuit in SEC v. Navellier, which similarly found no basis for a pecuniary harm requirement for disgorgement. As reported in our earlier alert, the Second Circuit’s decisions in Govil and SEC v. Ahmed3 also set up a conflict with the Fifth Circuit’s decision in SEC v. Hallam4 on the related question of whether the common-law limitations for equitable remedies under Section 78u(d)(5) – including that such remedies must not “exceed a wrongdoer’s net profits” and should be awarded to “victims” – similarly apply to disgorgement under Section 78u(d)(7). The diverging views among the appellate courts on key questions regarding disgorgement suggest that the Supreme Court will soon be asked to clarify the scope of available remedies under Section 78u(d).