On September 3, the Ninth Circuit issued an opinion in SEC v. Sripetch, 2025 WL 2525848, (9th Circ. Sept. 3, 2025), holding that the SEC may seek disgorgement from a defendant even if it cannot show that any individual investor suffered a pecuniary injury. The Ninth Circuit thus aligned itself with the First and Fifth Circuits and against the Second Circuit, in a circuit split that the Supreme Court might decide to resolve.
Prior Supreme Court Decision on Disgorgement Leaves an Open Question
The issue revolves around the proper interpretation of Liu v. SEC, 591 U.S. 71 (2020). In Liu, the Supreme Court held that disgorgement was permitted under Section 21(d)(5) of the Exchange Act, which enables courts to grant equitable relief in SEC actions. The Court found that equitable practices routinely served to deprive wrongdoers of their ill-gotten gains. However, Liu also held that courts could not order disgorgement to be paid to the government; instead, funds must be returned to defrauded investors whenever possible.
Some courts (like the Second Circuit) read Liu to require the SEC to show pecuniary harm to specific investors in order to support disgorgement. SEC v. Govil, 86 F. 4th 89 (2d Cir. 2023). Other courts (like the First Circuit) have held that no such showing is necessary. SEC v. Navellier & Assoc., Inc., 108 F. 4th 19 (1st Cir. 2024). Further, following Liu, Congress amended the Exchange Act by adding Section 21(d)(7), which expressly permits courts to grant disgorgement in SEC actions. The Second Circuit in Govil held that disgorgement under Section 21(d)(7) must conform to the equitable limitations recognized in Liu, while the Fifth Circuit has held that the amendment authorized the kind of disgorgement that courts had ordered before Liu. See SEC v. Hallam, 42 F. 4th 316 (5th Cir. 2022).
The Ninth Circuit Weighs in on the Issue
The Ninth Circuit has now weighed in on the split, siding with the First and Fifth Circuits, and against the Second Circuit.
In Stripetch, the SEC alleged that Ongkaruck Sripetch and other defendants engaged in numerous fraudulent schemes involving the sale of stock in at least 20 penny stock companies. Some of the schemes involved alleged stock scalping, in which Sripetch or third parties promoted stocks without disclosing that the actual funder of the promotions was planning to sell the stocks. Other violations involved “pump-and-dump” schemes in which the defendants allegedly used fraudulent means to inflate stock prices before selling stock and the sale of unregistered securities. Sripetch entered into a consent decree with the SEC but the amount of disgorgement was left to the courts. The district court imposed $2,251,923.16 in disgorgement along with prejudgment interest. SEC v. Sripetch, 2024 WL 1546917 (S.D. Cal. Apr. 8, 2024).
On appeal, Sripetch argued that the district court abused its discretion in ordering disgorgement because the SEC failed to show that any individual investor suffered pecuniary harm, relying on Liu. The Ninth Circuit disagreed, holding that there is no need to show loss causation as in private securities litigation, as the Second Circuit held in Govil.
The Ninth Circuit also rejected the Second Circuit's reasoning that disgorgement requires one or more identified victims. First, disgorgement, as Liu held, is governed by common-law principles and traditional equity practice, which only requires showing “an actionable interference by the defendant with the claimant’s legally protected interests.” The claimant need not show any loss, much less a pecuniary loss.
Second, in defining a victim as one who has suffered pecuniary harm, the Second Circuit did not properly interpret Liu’s observation that disgorgement “restores the status quo.” The Second Circuit ignored the distinction between compensatory damages, which are designed to compensate the victim for his losses, and restitution, which is designed to deprive the wrongdoer of ill-gotten gains. Similarly, the Second Circuit wrongly reasoned that Liu’s statement that the SEC must return a defendant’s gains to wronged investors meant that funds cannot be returned if there was no deprivation in the first place. Rather, Liu simply held that disgorged profits must be disbursed to victims rather than routinely deposited with the government.
What’s Next?
How would the Supreme Court rule? While difficult to predict, it seems likely that the Court would side with the First and Ninth Circuits in holding that disgorgement in SEC actions does not require a showing that individual investors suffered pecuniary harm. Disgorgement traditionally has been viewed as a mechanism for depriving wrongdoers of unjust gains—a mechanism that would be defeated if the SEC in some cases could not show a specific financial injury to investors as a result of a fraudulent scheme. In enacting Section 21(d)(7), Congress expressly enabled disgorgement in SEC actions without any requirement that the SEC demonstrate that investors suffered a specific financial injury. The Court also could find that the Second Circuit in Govil stretched certain observations and dicta in Liu into iron-clad principles of law that the Supreme Court never intended.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.
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