The Future of Disgorgement

Source: Investopedia

Introduction

Disgorgement is a legal remedy requiring a party who profits from illegal or unethical acts to forfeit any profits resulting from such conduct. The purpose of disgorgement is to prevent unjust enrichment and make unlawful activity unprofitable.

The Securities and Exchange Commission (SEC) has long used disgorgement as an enforcement tool. However, the boundaries of disgorgement remain in dispute because its limits are unclear. The circuit courts are currently split on whether disgorgement requires proof of pecuniary harm. 

On April 20, 2026, the United States Supreme Court will hear oral argument in SEC v. Sriptech, a case coming from the United States Court of Appeals for the Ninth Circuit, where the issue is whether disgorgement requires proof of pecuniary harm or whether the SEC may seek disgorgement without showing that investors suffered pecuniary harm.

Background

Despite Congressional and judicial efforts to define the boundaries of disgorgement, its limits remain unclear. 

15 USC §78u(d)(5) was enacted under the Sarbanes-Oxley Act of 2002, which amended existing securities laws such as the Securities Exchange Act of 1934. 15 USC §78u(d)(5) authorizes the SEC to pursue “any equitable relief that may be appropriate or necessary for the benefit of investors.”

In Kokesh v. SEC, the Supreme Court held that disgorgement operates as a penalty and that any claim for disgorgement from the SEC must be brought within five years from the date of the violation. Three years later, in Liu v. SEC, the Supreme Court held that a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded to victims is permissible as equitable relief. A year after Liu, Congress passed §  78u(d)(7), authorizing disgorgement without clear limitations.

The circuit courts are currently split on their interpretation of Liu. In SEC v. Govil, the Second Circuit held that a showing of pecuniary harm is necessary for a disgorgement award. On the other hand, in SEC v. Navellier & Assocs., Inc. the First Circuit held that a showing of pecuniary harm is not necessary for a disgorgement award.

In SEC v. Sriptech, the Ninth Circuit joined the First Circuit in holding that a showing of pecuniary harm is not necessary for a disgorgement award. The Ninth Circuit based its approach in part on common law principles and traditional equity practice, and in part on the word ‘disgorgement’ having a common-law origin, attaching it to its old meaning. In common law, a claimant seeking disgorgement only has to show that the defendant violated the claimant’s legally protected interests. Under this approach, disgorgement does not require a showing of pecuniary harm.

The Ninth Circuit also disagreed with the Second Circuit’s formulation of a pecuniary harm requirement based on the Supreme Court’s observation in Liu that disgorgement “restores the status quo,” because it assumes that the victim suffered a pecuniary harm. The Second Circuit reasoned that understanding "victim" to include defrauded investors who did not suffer a pecuniary harm would mean they would be receiving a benefit rather than restoration.

The Ninth Circuit stated that the Second Circuit ignores the distinction between compensatory damages, designed to compensate a victim for their losses, and restitution, which is designed to take away a wrongdoer's ill-gotten gains, as set out by the First Circuit in SEC v. Navellier.

Implications 

The Supreme Court's decision in Sriptech will set the standard in how corporations mitigate potential SEC enforcement. 

If the Supreme Court adopts the Second Circuit's approach requiring proof of pecuniary harm, it would reduce the SEC’s enforcement power, give defendants additional leeway to challenge disgorgement, and reduce financial exposure, especially in cases where pecuniary harm is difficult to prove. For example, in SEC v. Govil, the Second Circuit did not award disgorgement against a company’s founder who allegedly engaged in unlawful securities offerings, without first finding that the defrauded investors suffered a pecuniary harm. 

If the Supreme Court adopts the First and Ninth Circuits’ approach, allowing the SEC to seek disgorgement without proving pecuniary harm, it would broaden the SEC’s enforcement powers, making it harder to defend against disgorgement and increasing financial exposure. This would also increase a corporation's overhead because of the costs involved in implementing mitigating strategies to reduce SEC enforcement. 

Conclusion 

The Supreme Court’s decision in Sriptech will determine whether disgorgement remains a broad or narrow remedy, impacting how corporations approach enforcement risk and mitigation. 

*The views expressed in this article do not represent the views of Santa Clara University.