When the Securities and Exchange Commission ("SEC") brings a civil enforcement action in a securities fraud case, it has a range of potential remedies it can seek, including injunctive relief, disgorgement, and financial penalties. Historically, the SEC has treated disgorgement as a means to recoup the illicit gains received by the perpetrator of an alleged fraud.
Recent federal court opinions, however, are divided on the purpose of disgorgement, and whether the SEC can disgorge a defendant's ill-gotten gains without showing that investors suffered pecuniary harm. In 2023, the Second Circuit held in SEC v. Govil1 that such a showing was necessary, and in 2024, the First Circuit reached the opposite conclusion in SEC v. Navellier & Associates, Inc.2 The U.S. Supreme Court declined to resolve this circuit split,3 but the Ninth Circuit's recent decision in SEC v. Sripetch will likely give the Court another opportunity to weigh in.
On September 3, 2025, in Sripetch, a panel from the Ninth Circuit agreed with the First Circuit's reasoning and held that an award of disgorgement in a civil enforcement action under 15 U.S.C. § 78u(d)(5) and (d)(7) does not require a showing that investors experienced pecuniary harm.4 The Ninth Circuit's decision, which deepens the pre-existing circuit split, creates opposing rules in the two circuits where the SEC brings a large proportion of litigated enforcement actions (the Second and Ninth) and increases the likelihood that the U.S. Supreme Court will step in to resolve the split.
Background on Disgorgement in SEC Civil Enforcement Actions
Disgorgement is a profit-based remedy that arises under the law of restitution and unjust enrichment and that reflects the principle that "[a] person is not permitted to profit by his own wrong."5 Generally speaking, it is a form of restitution that is measured by a defendant's gain and that requires a defendant to give up those gains. Before the Second Circuit's decision in Govil, the SEC and courts proceeded on the assumption that disgorgement was the SEC's analogue to forfeiture in the criminal context. Because disgorgement was designed to prevent unjust enrichment, the SEC and courts took the position that a wrongdoer could be forced to disgorge all ill-gotten gains, regardless of any victim harm. Although Govil did not tackle the distinction between unjust enrichment and restitution head-on, the Second Circuit reasoned that any award of disgorgement must comport with traditional equitable principles, including that it be "awarded for victims."6
In the context of enforcement actions, the SEC, in the period before the passage of the Securities Enforcement Remedies and Penny Stock Reform Act in 1990, was limited to seeking injunctions barring future violations of securities laws.7 Given the lack of statutory authorization providing for monetary remedies, the SEC began to ask courts to "order disgorgement as an exercise of their 'inherent equity power to grant relief ancillary to an injunction.'"8 The Commission's legal bases for seeking—and courts' bases for awarding—disgorgement were strengthened in 2002 with the passage of the Sarbanes-Oxley Act, through which Congress adopted 15 U.S.C. § 78u(d)(5), granting the SEC authority to seek "any equitable relief" in civil enforcement actions.9
It was not until 2020, however, that the Supreme Court addressed whether disgorgement qualified as "equitable relief" authorized by 15 U.S.C. § 78u(d)(5). In Liu v. SEC, which arose from an enforcement action about defendantpetitioners' scheme to defraud foreign nationals by soliciting investments in a cancer-treatment center and by misappropriating the funds raised, the Supreme Court held that while disgorgement did qualify as equitable relief, lower courts had erred in awarding disgorgement in circumstances beyond the remedy's "common-law limitations."10 The Court ruled that (i) disgorgement awards under § 78u(d)(5) must be limited to the "net profits from wrongdoing after deducting legitimate expenses," (ii) a defendant's gains should be returned to wronged investors when practical, and (iii) disgorgement liability should not be imposed on a wrongdoer for benefits that accrue to his non-culpable affiliates.11
In 2021, a year after the Supreme Court's ruling in Liu, Congress, through the passage of the National Defense Authorization Act ("NDAA"), created a second statutory basis on which the SEC could pursue disgorgement awards: 15 U.S.C. § 78u(d)(7).12 That legislation provides 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."13 Since then, two circuit splits concerning the permissible nature and scope of disgorgement in SEC civil enforcement actions—including the split at issue in Sripetch—have developed. First, the Second and Fifth Circuits have disagreed over whether the common-law limitations the Supreme Court discussed in Liu apply to disgorgement under both § 78u(d)(5) and § 78u(d)(7) or only under § 78u(d)(5).14 Second, and relevant to the Ninth Circuit's holding in Sripetch, the Second and First Circuits have split on whether an award of disgorgement under § 78u(d)(5) and § 78u(d)(7) requires a showing of pecuniary harm to victims.15
Circuit Splits on Common-Law Limitations on Disgorgement and the Pecuniary Harm Requirement
The Fifth Circuit was the first appellate court to revisit the issue of disgorgement following the passage of the NDAA and introduction of § 78u(d)(7). In SEC v. Hallam, the Fifth Circuit considered an award of disgorgement ordered in an SEC enforcement action arising from defendants' orchestration of a massive scheme involving the unregistered and fraudulent offer and sale of investments in oil and gas prospects and the distribution of confidential information memoranda that were "replete with material misrepresentations and omissions."16 The Fifth Circuit held that § 78u(d)(7) "authorizes disgorgement in a legal—not equitable—sense," meaning that disgorgement under § 78u(d)(7) is not limited by the equitable principles recognized in Liu but instead follows the standards the federal courts developed before Liu. 17 Accordingly, the Firth Circuit held that to recover under § 78u(d)(7), the SEC must, consistent with the pre-Liu framework, approximate a defendant's unjust enrichment. The court made no mention of the SEC's need to show pecuniary harm to investors.18
In October 2023, a panel from the Second Circuit Court of Appeals, in Govil, considered whether disgorgement was appropriate where the court had made no finding that the investors suffered pecuniary harm. The case was predicated on an enforcement action the SEC brought against a single defendant who had caused a public industrial and technology company to engage in three fraudulent securities offerings. Specifically, the SEC alleged that Govil caused the company to represent to investors that the offering proceeds would be used for corporate purposes, when in fact, Govil misappropriated the more than $7 million in proceeds and used those funds to pay for unrelated personal expenses.19 The district court ordered disgorgement, and the defendant appealed, arguing that the disgorgement award was not authorized by the relevant statutory authority because such authority requires a showing that investors have been harmed and the court made no such finding.20 The Second Circuit vacated the disgorgement order, reasoning that "[f]unds cannot be returned if there was no deprivation in the first place,"21 and that a "victim" for purposes of 15 U.S.C. § 78u(d)(5) is "one who suffers pecuniary harm from the securities fraud."22 Rejecting the SEC's counterarguments that no finding of pecuniary harm was necessary because there...
