The SEC's $31M Wake-Up Call: Why the Tide Is Turning on Disgorgement

Most people do not pay attention to how the SEC really works.

They see a press release, they see a big number, and they assume the case was clean, the defendant was guilty, and the agency was just doing its job. That is the version Wall Street and the media want you to believe.

The reality is very different.

Right now, in courts across the country, the legal foundation that the SEC has used for years to take tens of millions of dollars from defendants is being challenged. And the agency itself is starting to back down. Quietly. Without admitting anything. Without giving back what it already took.

A recent challenge to a $31 million SEC disgorgement order is part of a much bigger shift. And anyone who has been in the crosshairs of this agency — including me — should understand what is happening.

The tide is turning. And it has been turning for a long time.

Most people do not know what the word disgorgement even means.

In plain English, it is when the SEC asks a court to make a defendant give up money the agency claims was made improperly. The number is almost always big. The press release is almost always loud. And the math is almost always done in the SEC's favor.

For years, the SEC treated disgorgement as a free shot. They would add up every dollar a business made, call it ill-gotten gains, and ask the court to write a check to the United States Treasury. No real victims. No real losses. No real accounting. Just a number designed to look like punishment.

That is not equity. That is a penalty dressed up as equity.

And the courts are finally starting to say so.

In 2017, the Supreme Court decided Kokesh v. SEC. The Court said clearly that SEC disgorgement is a penalty. That alone should have changed how the agency operated. It did not.

Then in 2020, the Court went further in Liu v. SEC. The justices said disgorgement is only allowed if it is limited to actual net profits and awarded for the benefit of actual victims. They warned the SEC about dumping money into the Treasury. They warned about joint-and-several liability. They warned about ignoring legitimate business expenses.

These are not small warnings. These are the rules.

The SEC ignored most of them. The agency kept pursuing huge disgorgement numbers, kept lumping defendants together, kept refusing to deduct real costs, and kept asking for money even when there were no investors to repay.

Courts are now catching up.

In 2023, the Second Circuit decided SEC v. Govil. That court said disgorgement requires the SEC to show that real investors actually lost money. Not theoretical harm. Not a regulatory violation in a vacuum. Pecuniary harm.

Other circuits pushed back. The First Circuit and the Ninth Circuit took the SEC's side and let the agency get disgorgement without proving victim losses. Now the Supreme Court has agreed to hear the issue in SEC v. Sripetch.

That is the bigger story.

While the press focuses on individual cases, the legal foundation under every SEC disgorgement order in the country is shaking. If the Supreme Court adopts the Second Circuit's approach, a lot of judgments will not survive. Not on appeal. Not on remand. Not on collection.

That is why this $31 million challenge matters. It is not one case. It is a signal.

Here is the part the agency does not want highlighted.

In May and June of 2025, the SEC voluntarily dismissed a cluster of pending unregistered-dealer cases. These were cases the agency had built, filed, defended, and pushed hard for years. Then, in two waves of dismissals, they simply walked away. The agency said the dismissals were appropriate as a policy matter.

Read that carefully. As a policy matter.

Translation: we are not going to admit we were wrong, but we are not going to keep fighting these cases either. We will dismiss the ones still pending, and we will keep the money from the ones already won.

That is the part that should make every defendant, every market participant, and every honest observer pause.

If those theories were strong enough to justify dismissing pending cases as a matter of policy, they were strong enough to justify revisiting the judgments already entered on the same theories. That asymmetry is the definition of a one-way ratchet.

For years, the SEC has expanded its reach not by writing rules, but by filing cases.

Instead of telling the market what the law actually requires, the agency would wait. Wait for a business to grow. Wait for an entrepreneur to take on risk. Wait until there was a big number to chase. Then file an enforcement action built on a theory that had never been clearly written down anywhere.

That is regulation by enforcement. It is unfair. It is unpredictable. And it punishes the people who actually try to operate businesses in real time.

The market cannot function when the rules are written after the fact. Compliance becomes guesswork. Innovation slows down. Lawyers get rich. Defendants get crushed. And the agency builds careers on cases that should never have existed.

The recent retreat from the dealer cases is the agency quietly admitting that some of those theories did not hold up. Not in court. Not in policy. Not in fairness.

If you are inside an SEC case, or if you have already been through one, this moment matters.

On the legal side, the strongest argument right now is layered. First, push hard on Liu. Disgorgement must be tied to actual net profits, not gross receipts. Real expenses must be deducted. Causation must be proven. Apportionment must be honest.

Second, preserve the Govil argument about pecuniary harm. Even in circuits that have not adopted it yet, the Supreme Court is going to weigh in. You want that issue alive in your record when the decision comes down.

Third, use the policy retreat. Not as a silver bullet, but as proof that the agency itself is unstable on the very theories it relied on. Courts care about consistency. Courts care about fairness. Courts care when the government changes its mind midstream without explaining why.

The combination is powerful: doctrine plus equity plus an inconsistent agency.

I have lived this. I have been on the receiving end of the SEC's broadest theories. I know what it feels like to watch an agency stretch a statute, lean on a friendly judge, push for a number that has nothing to do with reality, and call the whole thing justice.

It is not justice. It is leverage.

The SEC counts on the cost of defense being so high that most defendants settle. They count on the public not reading the fine print. They count on the press repeating the agency's numbers without question. They count on the courts deferring to expertise that, in many cases, is just policy preference dressed up as law.

That model is breaking.

Defendants are fighting back. Appellate courts are paying attention. The Supreme Court is engaged. And the agency itself is quietly retreating from cases it cannot defend.

That is the real story. Not one $31 million challenge. The whole framework.

The next twelve months will matter more than the last ten years.

If the Supreme Court adopts the Second Circuit's pecuniary harm rule, every pending SEC disgorgement case will need to be recalculated. Many will not survive. Some defendants will be entitled to vacatur. Others will at least get reductions. The SEC will have to rebuild how it asks for money.

Even if the Court goes the other way, the pressure is not going away. Liu is still the law. Net profits are still the limit. Causal nexus still has to be proven. The agency cannot pretend Kokesh did not happen.

And the policy retreat in the dealer cases is not getting reversed. The agency has already made that choice. That choice will follow them into every future case where they try to revive similar theories.

The era of unlimited SEC disgorgement is ending. Slowly. Quietly. But ending.

I have always believed that the market punishes people who pretend the rules do not apply to them. The same is true for regulators.

When an agency spends years pushing theories it cannot defend, walks away when convenient, and keeps the money it took on the way out, that is not enforcement. That is opportunism wrapped in a press release.

Defendants deserve clarity. Markets deserve fair rules. Courts deserve honest math. And the public deserves to know that the SEC is not above the law it claims to enforce.

The $31 million challenge is not just about one case. It is about whether the agency will be held to the same standard it holds everyone else to.

That fight is finally happening. And I am paying attention.

This article reflects my personal opinion only and should not be relied upon as legal, financial, investment, or tax advice. I am not your lawyer. Nothing in this article creates an attorney-client relationship or should be used as a substitute for advice from qualified counsel familiar with your specific situation.

Statements about cases, agencies, courts, and legal doctrines are based on publicly reported materials and may be subject to change as the law develops. Any reader involved in an SEC matter should consult experienced securities counsel before making decisions based on the issues discussed here.