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The US Supreme Court expressed little enthusiasm for curbing one of the Securities and Exchange Commission’s most important enforcement tools, as the justices weighed restricting the financial watchdog’s power to collect ill-gotten gains.

Hearing arguments in Washington Monday, the court considered whether the SEC must show identifiable investor harm in order to win “disgorgement,” a legal remedy designed to recoup illicit profits and return them to victims.

The high court limited the SEC’S disgorgement power in 2020, and critics of the commission are looking to build on that ruling.

But even Justice Clarence Thomas, who had voted to bar the use of disgorgement altogether in 2020, indicated he isn’t a sure bet this time around. Thomas told a lawyer arguing for new restrictions that “the world has changed in this area” because of a statute Congress passed in the aftermath of the 2020 ruling.

Although Monday’s session wasn’t definitive, the court spent less than a half hour questioning the Justice Department lawyer representing the SEC in its bid for broad disgorgement powers. That’s potentially a positive sign for the government from a court that often spends more than an hour peppering government lawyers with skeptical queries.

The court’s ruling will shape a panoply of SEC cases in which victims aren’t easy to pinpoint, from low-profile record-keeping violations to major insider trading allegations. The SEC used disgorgement to secure orders for more than $6 billion in fiscal 2024 and almost $11 billion last year.

The clash could also affect the SEC’s lawsuit against Elon Musk for allegedly flouting a deadline to disclose his growing stake in Twitter, now known as X, and in the process saving himself more than $150 million. In a suit filed days before President Donald Trump took office, the SEC is seeking disgorgement as well as civil penalties. Musk and the SEC told a judge earlier this month they are headed toward a trial.

Civil Penalties

Disgorgement is distinct from civil penalties, which the agency can use as punishment if it can meet the legal requirements. The Supreme Court in 2024 that defendants have a constitutional right to a jury trial in federal court when the commission asks for civil penalties.

The SEC says it should be able to win disgorgement without having to show identifiable investor harm, known to lawyers as “pecuniary” harm. Disgorgement “is designed to deprive the defendant of ill-gotten gains and is measured by profits,” Justice Department lawyer Malcolm Stewart.

Daniel Geyser, the lawyer challenging the SEC, said that approach would eliminate the distinction between disgorgement and civil penalties.

“It would permit an unbounded form of disgorgement rejected by this court and unmoored from its traditional roots,” said Geyser, who represents a man accused by the SEC of taking part in fraudulent schemes tied to at least 20 penny stock companies.

Geyser drew pushback from the court’s liberal wing, including Justice Ketanji Brown Jackson. “If we’re just disgorging his ill-gotten gains, I guess I’m not sure I understand why that’s a punishment,” she said.

Conservative Justice Neil Gorsuch pointed to SEC statistics indicating that only a small fraction of the money won in disgorgement orders ever gets returned to victims. Gorsuch suggested SEC defendants might at least be entitled to a jury trial under the Constitution’s 7th Amendment if the commission is keeping disgorgement awards.

“I don’t see how it would not trigger the Seventh Amendment if the government just decided to keep all the money,” Gorsuch said.

The case involves Ongkaruck Sripetch, who allegedly joined with associates to promote shares and then dump them before the price cratered. The schemes generated $6.6 million in illicit profits, according to the SEC.

Sripetch has separately pleaded guilty to one count of selling unregistered securities and was sentenced to 21 months in prison.

The case is Sripetch v. Securities and Exchange Commission,

Photo: Photographer: Andrew Harrer/Bloomberg