(Article from Registered Funds Regulatory Update, April 2026)
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On January 9, 2026, the U.S. Supreme Court agreed to review a 2025 Ninth Circuit decision affirming the SEC’s authority to obtain a $2.3 million disgorgement penalty in a civil-enforcement action. The Supreme Court’s decision will resolve a circuit split between the Second Circuit and the Ninth and First Circuits regarding the standard for awarding disgorgement as a form of equitable relief. Specifically, the question presented is whether the SEC may seek disgorgement in civil-enforcement actions without a demonstration that investors suffered actual financial loss, or pecuniary harm. This will be the third time in the past decade that the Supreme Court has examined the SEC’s authority to seek disgorgement. The Supreme Court last addressed the SEC’s disgorgement authority in Liu v. SEC in 2020, when it held that disgorgement should not exceed a wrongdoer’s net profits and must be awarded for victims. However, Liu left unresolved whether victims must be identified and whether they must have suffered financial harm to support a disgorgement award.
Subsequently in 2023, the Second Circuit, in SEC v. Govil, applied Liu and held that to qualify as an equitable remedy, disgorgement requires a finding that investors suffered pecuniary harm. In Govil, the Second Circuit quoted Liu to emphasize the point that “‘disgorgement must be ‘awarded for victims,’ and ‘a defrauded investor is not a ‘victim’ for equitable purposes if he suffered no pecuniary harm.’”
In contrast, the Ninth Circuit, in Striptech v. SEC, explicitly rejected the Second Circuit’s rationale as “[un]persua[sive],” and instead joined the First Circuit in holding that a showing of pecuniary harm is not a statutory “precondition” to disgorgement. While the Ninth Circuit agreed with the Second Circuit in so far as requiring a “victim” for the imposition of equitable disgorgement, it diverged on the basis of the meaning of “victim” in this context. The Ninth Circuit reasoned that requiring pecuniary harm would be inconsistent with disgorgement at common law, which requires interference with “the claimant’s legally protected interests,” rather than proof of loss, and that the Second Circuit’s proposed approach improperly “ignores the fundamental distinction between compensatory damages, which are designed to compensate [a victim for losses], and restitution, which is designed to deprive the wrongdoer of his ill-gotten gains.” By contrast in Govil, the Second Circuit determined a victim is “one who suffers pecuniary harm from the securities fraud” – highlighting Liu’s references to disgorgement as a tool to “restore the status quo” and “return … funds to victims,” which the Second Circuit reasoned “presupposes pecuniary harm.” The Second Circuit added that disgorgement without pecuniary harm to investors “does not aim to restore the status quo at all,” but rather would “‘confer [] a windfall on those who received the benefit of the bargain,’ contrary to Liu’s command to ‘bring disgorgement within equitable bounds.’”
The Circuit split has significant practical implications for SEC enforcement. As the petition noted, in fiscal year 2024, the SEC collected $6.1 billion in disgorgement, of which approximately $345 million (less than 6% of that total) was returned to investors, far exceeding the $2.1 billion in civil penalties collected by the SEC during the same period. The amount also far exceeded the aggregate $2.7 billion in disgorgement paid to investors since October 2020.
Under the Ninth Circuit’s approach, supported by the SEC, disgorgement would be available regardless of whether investors actually lost money, because disgorgement post-Liu is a “profits-focused remedy” that “rests on the principle that a wrongdoer should not ‘make a profit out of his wrong.’” By contrast, the Second Circuit’s ruling would require the SEC to establish investor losses before seeking that remedy. Oral arguments before the Supreme Court are expected to commence on April 20, 2026.
Petition for a Writ of Certiorari, Sripetch v. SEC (Oct. 14, 2025).