Developments in securities litigation move fast, and not all of them matter equally. Each month, Alto Litigation curates and summarizes the cases, rulings, and regulatory actions most likely to shape risk and strategy in the months ahead.
SCOTUS Backs SEC on Disgorgement
On June 4, a cheer likely echoed through the halls of the Securities and Exchange Commission in Washington, D.C.. After a series of legal setbacks at the Supreme Court, the SEC finally won one: In Sripetch v. SEC, the Court unanimously held that the SEC may seek disgorgement of illicit profits from a wrongdoer without the need to show any actual pecuniary harm to investors.
The decision resolved a split among the Circuit Courts of Appeal, in which the First Circuit and Ninth Circuit (where Sripetch originated) held that there was no requirement to show that investors suffered pecuniary damages, whereas the Second Circuit held that such harm needed to be demonstrated. The Sripetch decision followed the Court’s 2020 decision in Liu v. SEC, which held that Section 21(d)(5) of the Securities and Exchange Act, authorizing courts to grant equitable relief in SEC actions that is “appropriate or necessary for the benefit of investors,” included the remedy of disgorgement, but also holding that, among other things, disgorgement must be awarded for the benefit of investors, not the Treasury. After the Liu decision, Congress enacted Section 21(d)(7) of the Exchange Act expressly authorizing the SEC to seek disgorgement.
In the underlying case, the SEC alleged that Ongkaruck Sripetch ran a pump-and-dump fraud, and in connection with a settlement, obtained a court order requiring disgorgement of over $4.1 million. Sripetch objected to the order on the grounds that there were no victims for whom disgorgement could be ordered under Liu.
The opinion of Justice Gorsuch held that there was no need to decide whether Section 21(d)(5) or (7) applied, because under traditional equitable principles, a court could order a defendant “to disgorge the value attributable to his invasion of the plaintiff’s legally protected interests without requiring a showing of pecuniary loss.” Here, the fraudulent stock scheme violated the legally protected interests of defrauded investors. The Court rejected Sripetch’s concern that the SEC might use Section 21(d)(7) to obtain penalties without a jury trial, stating that the Court would remain vigilant against any effort by the SEC to transform disgorgement into penalties because that would exceed basic equitable principles and require a jury trial. In a concurring opinion, Justice Thomas suggested that Congress’ decision to separate disgorgement from equity indicated that disgorgement was a legal remedy requiring a jury trial.
Why It Matters: The Sripetch decision preserves the SEC’s ability to obtain disgorgement so long as it can show that a defendant invaded the “legally protected interests” of investors even if the SEC cannot show actual financial harm to investors. But the victory came with a warning that the Court will ensure that the SEC does not overstep its boundaries and use traditional equitable principles as a basis for disguised penalties. Justice Thomas’ concurring opinion may foreshadow a coming battle over whether disgorgement orders require a jury trial.
SCOTUS Rejects Private Right of Action to Sue Investment Companies
On June 11, a divided Supreme Court held that investors do not have the right to sue an investment company under the Investment Company Act of 1940 to rescind a contract that violates the ICA’s provisions, holding that only the SEC has the authority to bring suit.
Section 47(b) of the ICA provides that a contract that violates the ICA or any rule thereunder is unenforceable by either party and that to the extent that such a contract has been performed, “a court may not deny rescission at the instance of any party” unless the denial of rescission would produce a more equitable result.
In FS Credit Opportunities Corp. v. Saba Capital Master Fund, the Court, in a 6-3 vote, reaffirmed prior decisions holding that courts will not imply private rights of action where Congress has not expressly authorized lawsuits, even if that means that there is a purported “right” that cannot be enforced. The decision by Justice Barrett reversed a decision by the Second Circuit holding that a private right of action existed under Section 47(b), in contrast to other Circuit Courts, including the Ninth Circuit, holding to the contrary.
In FS Credit Opportunities Corp., Saba Capital, a shareholder activist, sued 16 closed-end mutual funds, alleging that the funds violated the ICA’s requirement that every share of stock shall have equal voting rights with every other outstanding stock. The Court held that the language of Section 47(b) did not create a private right of action, but was only a “mandate . . . directed to courts” that they cannot deny rescission to parties who request it unless the equities and statutory purposes favor a different result.
Section 47(b)’s text presupposes that parties are already before the court and directs the court’s use of remedial authority. But the statute empowers the SEC to enforce the ICA, not private parties, except for two provisions that expressly authorize private lawsuits, which shows that Congress knew how to create express rights of action when it wanted to do so. The dissent by Justice Jackson, in which Justice Sotomayor joined and Justice Kagan joined in part, held that the text, structure and statutory history of the ICA supported a private right of action under Section 47(b).
Why It Matters: The decision is mildly surprising, given that at oral argument, Chief Justice Roberts and Justice Kavanaugh appeared to express sympathy for a private right of action under Section 47(b). But the conservative majority‘s hostility to private rights of action for the past 30 years won out. Congress could always create an express right of action under Section 47(b) but does not appear interested in doing so. A more interesting question is whether the Court at some point would consider reversing longstanding implied private rights of action under the securities laws, such as Section 10(b) of the Exchange Act.
SCOTUS Limits Scope of Right to Jury Trial Under SEC v. Jarkesy
On June 4, in addition to the decision in Sripetch v. SEC (see above), the Supreme Court issued another decision which, although concerning the powers of the Federal Communications Commission, addressed the scope of the Court’s decision two years ago in SEC v. Jarkesy. That decision held that defendants in SEC actions alleging fraud and seeking penalties were entitled to a jury trial under the 7th Amendment to the Constitution and could not have their case adjudicated by an in-house administrative proceeding.
Jarkesy set the stage for the decision in FCC v. AT&T, in which the FCC investigated AT&T and Verizon regarding their treatment of cellular location data. Concluding that the carriers had violated rules requiring them to keep the information confidential, the FCC issued orders seeking forfeiture from the carriers in the amount of $57 million from AT&T and $47 million from Verizon. After such an order, the carrier could pay the fine and appeal to a Circuit Court, or it could not pay the fine, in which case the Government could file a lawsuit to collect the fine that would be a jury trial de novo. The Fifth Circuit held that the action against AT&T violated the right to a jury trial, while the Second Circuit held that the FCC did not violate the 7th Amendment when it issued a forfeiture order against Verizon.
Reversing and remanding the decision of the Fifth Circuit, the Court ruled 8-1, in a decision by Chief Justice Roberts, that the forfeiture orders did not determine the carriers’ legal obligations because there was no final obligation to pay. There were no penalties for nonpayment, interest did not accrue, and there were no collateral legal consequences. Thus, this situation differed from Jarkesy, in which penalties were immediately enforceable without a jury trial. The 7th Amendment does not apply to preliminary legal proceedings or the risk of reputational harm. Justice Thomas dissented, stating that there would not have been the kind of jury trial that the Government now promised when the forfeiture orders were entered in 2024.
Why It Matters: It is interesting that at oral argument the Government’s attorney represented to the Court that the forfeiture orders were fairly worthless, without any binding legal effect. Will that be the means by which agencies now will use to circumvent Jarkesy – arguing that the in-house administrative proceedings are only preliminary and really pointless, so that the 7th Amendment does not apply. Also noteworthy is that the Court rejected the carriers’ argument that the Government had violated their constitutional rights by making it too costly to exercise them – either the companies would have to pay the fine and appeal, or not pay and wait nervously to see if the Government brought a collection action within the five-year statute of limitations. Maybe that argument does not apply to wealthy companies like AT&T and Verizon, but would it have more clout with a smaller company or an individual?
SCOTUS Decides the President May Fire Agency Commissioners
In a decision that will affect the operation of the SEC, as well as many other federal agencies, the Supreme Court on June 29 overturned a 91-year-old decision and in a 6-3 vote struck down a federal law barring the President from firing members of the Federal Trade Commission except for “inefficiency, neglect of duty or malfeasance in office.” In other words, so-called “independent regulatory agencies” are no longer independent; they are merely part of the executive branch and a President may fire commissioners without cause.
The SEC, like other regulatory agencies, has five commissioners, of which no more than three may be from one party. Typically, three commissioners, including the chairman, come from the party of the President and two are from the opposition party. The commissioners are nominated by the President and confirmed by the Senate. But Congress prohibited the President from firing the commissioners without cause, a structure affirmed by the Supreme Court’s 1935 decision in Humphrey’s Executor v. U.S., in which the Court held that President Roosevelt lacked authority to fire an FTC Commissioner because the agency had a quasi-legislative and quasi-judicial function, and therefore was not part of the executive branch.
But Chief Justice Roberts, writing for the Court in Trump v. Slaughter, held that the President could remove Rebecca Slaughter, a Democratic appointee to the FTC, without cause because the for-cause removal provision enacted by Congress violated the Constitution’s separation of powers doctrine. The majority opinion held that the FTC was now invested with sweeping powers to conduct investigations, bring lawsuits and issue regulations, far different than conditions in 1935. Because the FTC’s activities fall well within “the heartland” of executive power, they must be controlled by the President. Justice Sotomayor dissented, in an opinion joined by Justices Kagan and Jackson.
Note: The Court separately held that the President could not fire a Governor of the Federal Reserve without cause, given the structure of the statute creating the Federal Reserve and the traditional independence accorded national banks.
Why It Matters: It is unclear how the Court’s decision will impact the SEC and securities regulation. It may mean that a President will not nominate members of the opposition party to be SEC Commissioners. After all, why nominate someone and have the Senate bother to confirm, when the President could fire the new Commissioner immediately after the swearing-in? Indeed, the SEC presently has three Republican and no Democratic Commissioners.
There will be a loss in not having members of the opposition party as Commissioners. They function to “keep the majority honest,” asking pointed questions at Commission meetings and issuing dissenting decisions to regulatory actions. The presence of opposition commissioners may force a compromise on more controversial decisions. Thus, the Slaughter decision may mean that securities regulation will swing more wildly from Administration to Administration. There may be some institutional barriers to firing commissioners of the opposite party; if the Senate is controlled by the opposition party, the majority may send word that if the President keeps firing its commissioners, the Senate will not confirm the President’s nominees.
Delaware Chancery Court Splits on Chairman’s Equity Grant and Director Pay Claims
On June 15, the Delaware Chancery Court split the baby when it came to derivative claims concerning a one-time equity grant to the company’s chairman and increased compensation to non-employee directors.
The decision in Ayers v. Foley analyzed the impact of the 2025 amendments to the Delaware General Corporation Law. First, because the two committees that approved the chairman’s equity grant were composed of directors that met independence standards, the plaintiff had to overcome the heightened presumption of disinterestedness codified in Section 144(d)(2). In conjunction with Delaware Civil Procedure Rule 23.1, this statutory mandate elevates the burden to rebut a director’s impartiality, requiring substantial and particularized allegations of a material interest or relationship. The Court held that the complaint failed to satisfy this standard. Nor did the plaintiff plead facts showing that a majority of the Board faced a substantial likelihood of liability for approving the grant.
By contrast, the directors’ self-compensation was a different matter, because the approving committee members were inherently interested. Absent a stockholder vote compliant with Section 144(a)(2), the approval had to meet the entire fairness standard, meaning that defendants bear the burden of showing that the transaction was both the product of fair dealing and that the price was fair. At the pleading stage, the plaintiff had satisfied the burden of pleading facts showing that the enhanced compensation was the product of unfair dealing and an unfair price. The breach of fiduciary duty claim survived against the directors who approved the compensation, but not against the passive recipients of the award.
Why It Matters: This decision illustrates the application of the new amendments to the DGCL in analyzing conflicted transactions. In particular, the decision demonstrates the importance of having conflicted transactions approved by committees composed of independent directors. But where the directors themselves are conflicted, it is necessary for the transaction to be approved by an informed, non-coerced majority of disinterested stockholders.