Background
The U.S. Securities and Exchange Commission (SEC) has filed a petition with a federal appeals court, urging it to review a recent ruling that prevents the agency from recovering ill-gotten gains in cases where no victims were harmed. The SEC argues that upholding the ruling would allow individuals in the securities industry to profit from illegal activities.
The Scope of the Issue
The impact of this ruling extends to a wide range of cases, including those involving allegations of non-compliance with securities regulations within the cryptocurrency industry. The SEC possesses the authority to reclaim ill-gotten gains through disgorgement, an important mechanism for restoring justice.
The Supreme Court’s Limitations
In 2020, the U.S. Supreme Court established limitations on disgorgement by ruling that it cannot exceed the net profits obtained from the unlawful conduct. Furthermore, the Court emphasized that disgorgement should primarily benefit the victims affected by the wrongdoing.
The Misapplication of the Supreme Court’s Decision
The SEC’s petition challenges the 2nd Circuit’s interpretation of the Supreme Court’s ruling in the case against Govil, who was accused of misappropriating investor funds. Despite the initial disgorgement order of $5.8 million against Govil, the 2nd Circuit determined that the SEC had not sufficiently demonstrated harm to investors.
Restoring the Status Quo
The SEC argues that the purpose of disgorgement is to restore the status quo by depriving wrongdoers of their ill-gotten gains, not solely to compensate victims for financial losses. Matthew Ford, an attorney representing Govil, maintains that the 2nd Circuit’s decision aligns with the Supreme Court’s guidance, stressing that the SEC must demonstrate actual financial losses incurred by investors in order to seek their restitution.