On June 4, the U.S. Supreme Court unanimously held that the SEC need not prove investors suffered pecuniary loss before obtaining a disgorgement award in a civil enforcement action. The case involved a defendant who the SEC alleged engaged in fraudulent penny-stock schemes and who subsequently consented to the entry of judgment against him but argued that disgorgement was improper because the SEC lacked evidence that investors suffered financial losses. Resolving a split among the Courts of Appeals, the Court affirmed the 9th Circuit’s ruling and held that traditional equitable principles do not require a showing of pecuniary loss before an investor may qualify as a “victim” entitled to an award of a wrongdoer’s profits. The Court explained that disgorgement is measured by the defendant’s gain from wrongdoing — not by the plaintiff’s loss — and that a victim who has “suffered an interference with protected interests” may be entitled to “restitution of [the defendant’s] wrongful gain” even when the victim has suffered “no measurable loss whatsoever.”

The Court rejected the defendant’s argument that its prior decision in Liu v. SEC (previously covered by InfoBytes here) required proof of pecuniary loss, noting that while Liu held disgorgement must be “awarded for victims,” that requirement does not demand a showing of financial loss before a person qualifies as a victim. The Court also rejected the argument that allowing disgorgement without proof of pecuniary loss would be inconsistent with Liu’s characterization of disgorgement as a remedy designed to restore the status quo, reasoning that equity “traditionally prefers” to strip defendants of unjust gains rather than allow wrongdoers to benefit from their misconduct simply because the plaintiff’s financial position has not changed. Finally, the Court declined to decide whether Congress’s post-Liu enactment of 15 U.S.C. § 78u(d)(7) — which expressly authorizes disgorgement — frees the SEC from the traditional equitable rule that disgorgement must be awarded for victims.

Justice Clarence Thomas filed a concurrence, arguing that disgorgement is now a legal remedy following Congress’s statutory amendments, and that the Seventh Amendment should therefore require a jury trial when the SEC seeks disgorgement — a question he urged the Court to address in a future case.