Supreme Court Demurs on Disgorgement Standards

On June 6, 2025, the U.S. Supreme Court denied a petition for a writ of certiorari in Navellier & Associates Inc. v. SEC pertaining to the circumstances under which the SEC is entitled to an award of disgorgement. Arising out of the First Circuit Court of Appeals, the Navellier petition asked the Supreme Court to resolve a circuit split among the First, Second, and Fifth Circuits regarding whether the SEC was entitled to disgorge a wrongdoer’s ill-gotten profits in the absence of investor harm. By denying the petition, the Supreme Court left untouched divergent disgorgement standards that may limit the SEC’s ability to recover disgorgement, depending on where a case is filed.

For more than 50 years, the SEC has routinely sought (and often been awarded) disgorgement in its civil enforcement actions. The boundaries of this core SEC remedy largely went unquestioned until 2020, when the Supreme Court considered for the first time whether disgorgement was an “equitable” remedy authorized under section 21(d)(5) of the Securities Exchange Act of 1934 (Exchange Act). Specifically, in Liu v. SEC, the Supreme Court confirmed that disgorgement is equitable relief that is permissible under section 21(d)(5), so long as it does not exceed a wrongdoer’s net profits and is awarded for victims.

Following Liu, Congress in 2021 amended the Exchange Act by adding section 21(d)(7), which provides that the SEC “may seek, and any federal court may order, disgorgement.” Even though that amendment sought to clarify the SEC’s authority to seek disgorgement, it did not settle questions raised by Liu. Specifically, uncertainty remained regarding whether Liu prevented an award of disgorgement when investors did not suffer any pecuniary harm and whether disgorgement was a “legal” remedy not subject to the “equitable” limitations of Liu.

The Fifth Circuit was the first appeals court to consider the scope of disgorgement after the 2021 amendment. In its 2022 opinion in SEC v. Hallam, the circuit court held that, as amended, section 21(d) “authorizes disgorgement in a legal — not equitable — sense. In doing so, it ratifies the pre-Liu disgorgement framework used by every circuit court of appeals.” In other words, consistent with past practice, the SEC only needed to approximate a wrongdoer’s ill-gotten profits but was not required to demonstrate that investors suffered any pecuniary harm. Similarly, in a 2024 opinion in SEC v. Navellier & Associates Inc., the First Circuit reached a similar conclusion as Hallam, holding that neither Liu nor First Circuit precedent “require[s] investors to suffer pecuniary harm as a precondition to a disgorgement award.” Navellier opined that disgorgement is a “profit-based measure of unjust enrichment” that is not tethered to the “direct economic loss [of] the complaining party.”

The Second Circuit also considered the amendment’s impact on disgorgement but reached a decision that conflicted with the First and Fifth Circuits. In its 2023 opinion in SEC v. Govil, the appeals court “expressly disagreed” with Hallam’s conclusion that disgorgement “is not limited by the equitable principles recognized in Liu.” To the contrary, the Second Circuit concluded that the “equitable limitations on disgorgement survive the [2021 amendment]” and that equitable disgorgement can only “be awarded for victims” based on a finding that they suffered “pecuniary harm.”

Accordingly, unless the Supreme Court acts, the existence of pecuniary harm — depending on the circuit — may or may not be a necessary element of proof for an award of disgorgement.