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The agency used it to secure orders for almost $11 billion last year and more than $6 billion in 2024. That tool is at risk in a case before the Supreme Court where the justices are weighing whether the SEC has to show that victims suffered economic harm before it can force a wrongdoer to turn over the profits made from illegal activities. Justice Sonia Sotomayor pointed out how cumbersome that would be for the SEC. So basically what you're saying is the government has to call every victim, prove every dollar of loss? Why bother? Why bother asking for disgorgement if they have to prove loss to that amount? I thought disgorgement was to make it easier as an alternative. But the lawyer representing a man accused of taking part in fraudulent schemes tied to 20-penny stock companies argued that disgorgement is different from civil penalties, which the agency can use as punishment if it meets the legal requirements. But neither liberal Justice Ketanji Brown-Jackson nor conservative Justice Amy Coney Barrett seemed to buy that argument. Why is it a punishment if we're not taking anything more from the defendant than he unlawfully gained? Why does that look like a penalty? If all you're taking away is the ill-gotten gains, so they're the proceeds that the wrongdoer isn't entitled to in the first place, as opposed to being entirely punitive because it's going above and beyond, why would that necessarily be a penalty? Most of the justices showed little enthusiasm for curbing the SEC's disgorgement powers. My guest is securities law expert James Park, a professor at UCLA Law School. Jim, disgorgement is different from civil penalties. Will you explain the difference and how the SEC uses it? Yeah, disgorgement simply means that the defendant has to give back the net profits from their wrongdoing. And that's something that you can measure by looking at their revenue, their expenses. And it's based on the principle that a wrongdoer should not be able to keep the proceeds from their wrongdoing. That's basically what disgorgement is. Penalties can be imposed for a broader range of reasons. And one of them may be to punish, to deter someone. And so the thinking of a penalty is that if I just have to give back the profits from my wrongdoing, then, you know, my incentive is to break the law because all I have to do is give back the proceeds from the fraud. Whereas with a penalty, I may have to pay much more than the amount that I gained. And so I may end up a significant loser if a penalty is imposed. And another interesting thing is the SEC only got the general power to impose civil penalties in 1990. And prior to that, it primarily used disgorgement, which was a power that the courts gave the SEC starting in the 1970s or so. What happened in this case? Who is the defendant here? The defendant was Sripach, and he basically was involved with a number of penny stock companies, companies that are, you know, startup companies with very little track record. And, you know, the valuation of these stocks is very, very low, you know, maybe pennies. And, you know, there's a market for these stocks. And because they don't trade on, say, the New York Stock Exchange, the prices can fluctuate fairly widely. They're more susceptible to manipulation. and allegedly what the SEC says is that Sripach basically manipulated the price of these penny stocks and he would promote them on his website, inflate the price. He allegedly manipulated the price by engaging in what are called wash trades, basically trading with himself or a friend to create the appearance that the price of these stocks is going up. Once the price was inflated, he may have sold his stake in the penny company. So this is a pretty standard type of violation of securities laws. The SEC alleges that this was a fraudulent scheme. And so the SEC brought a case against Repetch alleging all these violations, but it didn't specify the precise victims of the fraudulent scheme. And I can only speculate as to why they didn't specify the precise victims, But one reason may be that in a penny stock market, it may be hard to identify particular individuals who are buying and selling. Also, you know, if I'm alleging that the wrongdoing was that you manipulated the market at a particular point in time, you have to figure out, well, who, you know, who bought at that inflated price? Did they lose money? And that can be a complicated endeavor to track down these particular individuals and, you know, identify exactly when they bought and sold and whether they lost money or not. So they didn't identify the individuals who suffered losses from the fraudulent scheme. And so is the issue just whether or not the SEC has to show the victims suffered economic harm before they can get a wrongdoer to disgorge profits? That is the issue. There was a decision by the Second Circuit, SEC versus Goebbels, and the Second Circuit had concluded that the SEC must show pecuniary injury in order to get disgorgement. And they based their reasoning on a decision by the Supreme Court, Liu versus SEC, where the court basically held that the SEC is permitted to seek disgorgement if it is awarded for a victim. That's the language that was used. And so the Second Circuit basically extrapolated from that and said that, well, if it must be awarded to victims, then there must be some injury to those victims that can be recoverable. And Sripic was in the Ninth Circuit, not the Second Circuit. The Ninth Circuit came to the opposite conclusion and said the SEC can obtain disgorgement without showing a pecuniary injury to a victim, so long as they showed some interference with a victim's legally protected interests. It would be difficult, wouldn't it, in most cases to show all the victims in some of these schemes who suffered losses? It is. It's difficult to identify victims. And sometimes there's not a clear pecuniary loss. For example think about insider trading Insider trading in a stock that is trading in a liquid market it very difficult to precisely identify who is harmed by that insider trading But insider trading, as we know, is a clear violation of securities law. And there's a clear benefit to the defendant. They make a lot of money by misusing inside information. And so under the Second Circuit's reasoning, their interpretation of Lou, there's a good chance that in an insider trading case that there would not be any disgorgement. And, you know, this is something that the SEC does all the time. It seeks disgorgement in insider trading cases. And there are other, you know, examples where you have, you know, wrongdoing, but it's very difficult to assess who is damaged and suffered losses from that securities law violation. So let's talk about some of the questioning by the justices. Two justices, Liberal Justice Ketanji Brown-Jackson and conservative Amy Coney Barrett, questioned the argument that disgorgement would amount to impermissible punishment by the SEC if it failed to prove that the victims had experienced economic harm. So Justice Ketanji Brown-Jackson said, if they're just disgorging his ill-gotten gains, I guess I'm not sure I understand why there's a punishment. And Amy Coney Barrett said, why does that look like a penalty if all you're taking away is the ill-gotten gain? So they're the proceeds that the wrongdoer isn't entitled to in the first place. I mean, that seems to make logical sense to me. He's not entitled to this. It does. Yeah, it does. And I think, you know, in defense of the defendant, they were relying upon a number of prior cases decided by the Supreme Court. For example, the Kokesh decision was one where the court said that cases where the SEC is seeking disgorgement are subject to the statute of limitations that applies to penalties. And in the course of deciding that case, they suggested that sometimes disgorgement can actually punish an individual and therefore can be seen as a penalty, at least in terms of whether or not it fits within the statute of limitations for penalties. Prior to Kokesh, the position was that the SEC's disgorgement cases were not subject to a statute of limitations. And Liu as well suggests that disgorgement is most likely not a penalty when the money goes to the victims of the violation. And so it sort of built on Kokesh. And so in the defendant's defense, I think that, you know, the defendant in Second Circuit was extrapolating from some of the language in these prior cases, which I think some of the justices are now backing away from a little bit and trying to kind of go back to the more common sense idea that, you know, there's this concept of disgorgement and unjust enrichment that's been around for a long time. And, you know, the basic principle is the simple one that you just have to give back your gains from wrongdoing, which doesn't really seem like a penalty more generally. In addition, Congress passed a law, a statute after Liu in 2021 that basically says the SEC is permitted to seek disgorgement. And that statute doesn't put any conditions on disgorgement and doesn't say, well, you have to establish somebody was harmed and suffered pecuniary injury. And that's an argument for the plaintiff. Now, what the defendant would say is that, well, the Congress in passing the statute, they knew about the language in lieu, which implied that disgorgement often goes to victims or the money should go to victims for it not to be a penalty. And therefore, maybe the statute incorporates the Supreme Court's definition as the defendant understands it. So this case, to some extent, could be decided as a statutory interpretation issue. What does Congress mean when it's said after Lou that the SEC has the power to seek disgorgement? Coming up next on the Bloomberg Law Show, I'll continue this conversation with UCLA Law Professor James Park. Justice Gorsuch suggests that if the SEC is keeping the disgorgement awards rather than returning the money to the victims, perhaps the defendant's entitled to a jury trial. I'm June Grosso, and this is Bloomberg. This message is brought to you by AppleCard. AppleCard members can earn unlimited daily cash back on everyday purchases wherever they shop. 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The world has changed in this area since Lou, and disgorgement is now in, what, Section 7? That's correct. And it has a different statute of limitations. But Justice Neil Gorsuch suggested that defendants might at least be entitled to a jury trial under the Constitution's Seventh Amendment if the commission is keeping disgorgement awards rather than returning the money to the victims. Here is his exchange with the Justice Department attorney representing the SEC, Malcolm Stewart. So you think you can get a disgorgement without any effort to get it back to the investors and keep that in equity in front of a judge rather than trigger a jury trial right as a penalty? Yes or no? It's a two-part question. No, it's a one-part question. We would say yes, but I think it's a... Yes, you can keep it in equity before a judge without a jury and make no effort to send the money back to investors. That would be our position. OK, let's say that's wrong. OK. The Supreme Court said in 2024 that defendants have a constitutional right to a jury trial in federal court when the SEC asks for civil penalties. I've been talking to Professor James Park of UCLA Law School. In reality, when there is a disgorgement, does the SEC often return it to the victims or does it usually go into the Treasury? It varies. And that's something that's controversial is sometimes the SEC is not able to identify victims. It's not able to get the money back to the victims. And so then it goes back to the Treasury. And so, you know, there is some criticism of that practice. On the other hand, you might say, well, you know, Congress might understand this and recognize this and say, well, maybe that's a good result. That money could go to funding the SEC and other investor protection programs. And so they may be the proper person to to get the payment rather than the victims themselves In the past the Supreme Court has limited the SEC disgorgement powers the last time in 2020 Did you get a sense of which way the court was going from these oral arguments? Well, I think the justices may be signaling, at least in the oral argument, their questions seem to indicate that they may not want to go much further. And I think there are a couple of reasons for this. I think most importantly, you know, they're wary of Congress, right? Congress said the SEC has the power to ward disgorgement. You know, if the court basically cuts it back too much, Congress may come back and effectively overrule that by passing a new statute. And so I think they're wary about Congress in this space. Secondly, I think they might be wary about handicapping the SEC too much and drastically reducing its enforcement power in a way that's arguably not consistent with a certain view of disgorgement and case law. You know, there are a number of cases cited by the SEC and amicus briefs where, you know, courts have awarded disgorgement without a clear pecuniary harm to plaintiffs. And so kind of, you know, going against that tradition is something I think some of the justices may be wary of as well. Yeah. So, I mean, if you go by just the timing of it, they spent less than half an hour questioning the SEC's lawyer. And I can't remember the last time that's happened. Did any of the justices seem to you to be against the SEC's position? You know, I think Gorsuch was one who asked a few questions that could be interpreted as indicating he may be leaning against the SEC. He asked a question about, well, you know, when Congress passes a statute, don't we assume they incorporate our prior definitions from case law, right? If it's true that Liu says disgorgement requires some sort of an award for victims, Congress at the time it passed the new statute knew this. And if they disagreed with it, they could have specifically defined it in some other way. So he asked that question, and that might be an indication he's leaning in that direction. That was the one who seemed most open minded to the defendant's argument, Shreepet's argument in the case. but it did seem like the other justices were most likely leading the other way. Gorsuch also suggested that the defendant might have a right to a jury trial if the commission is keeping the awards and not returning the money to victims. And in 2024, the Supreme Court did say defendants have a constitutional right to a jury trial when the commission is asking for civil penalties. Gorsuch said, I don't see how it would not trigger the Seventh Amendment if the government just decided to keep all the money. So how does that play in here? It's a great question. And the decision of Giacase, which basically said that when the SEC is seeking civil penalties for fraud, that there is a right to a jury trial in those circumstances. And so could there be situations where disgorgement effectively is awarded in a fraud case? If that's the case, could there be an argument that the Seventh Amendment could apply? And I think that's certainly possible. I don't know, though, if that necessarily means that in every disgorgement case, you have to show some injury. And so I don't think that's an insurmountable barrier to the SEC's position. But the broader point that I've heard made with respect to Sripic's position here is that, well, you know, if you say that you can get disgorgement without these limitations, then, you know, you can do that since it's an equitable remedy. You can do that without a jury. Right. One of the implications of a case inequity is you're not entitled to a jury trial. And so the SEC could, in theory, just seek disgorgement against defendants and avoid jury trials if it wanted to. I'm not sure if the SEC would normally do that because they often charge both. They often charge both penalties and disgorgement. And so if you had a jury trial with respect to the civil penalties, I think you'd still have it, assuming the SEC didn't try to game the system and just seek disgorgement. And, you know, the other point to make is that, you know, Giacchese didn't say you're always entitled to a jury trial if there's civil penalties. It has to be a fraud case, a case where you're alleging some sort of fraud. That's a common law action that the right to jury trial would be preserved for. So there's some interesting kind of questions at the boundary here, but I'm not sure that they are a reason to adopt the particular definition for disgorgement. What kinds of cases does the SEC normally seek disgorgement in? I mean, are there certain categories where they would seek disgorgement and others where they wouldn't? You know, are there cases where it's not clear that somebody profited from their wrongdoing? Right. I could imagine a situation where, you know, suppose I sell a bunch of securities without registering them. And, you know, I actually don't make any money because, you know, nobody buys the securities. I spend a bunch of money marketing them. Nobody believes me. And therefore, I actually lose money on the scheme. But I clearly violated securities law. And so disgorgement wouldn't be available. But I still might want to penalize you in that case because I want to make sure you follow securities law in the future. And I think this is an argument that's coming up more after the Liu decision, which is that I think defendants have this argument now that, you know, I didn't have any net profits from my scheme. And so there's no disgorgement available because I lost money. I spent all this money investing in this fraud, but it didn't pay off. Right. And so in those situations, you're going to want to want to seek a penalty. But it is true in most cases, they're only going to go after you if you've made a lot of money off of innocent investors. That's typically the type of case the SEC is going to seek. How important is this case? This is seen as a very important case for the SEC. I was at a conference with a number of SEC attorneys a few months ago, and I got the sense they're very worried about this particular case. I think they see it as potentially having very significant implications with respect to their enforcement program. In addition, some of the prior cases the court has has decided, you know, put some real limitations on the SEC's power to seek disgorgement. And it does complicate their enforcement efforts to some extent. And it gives defendants a few more tools in their toolbox to resist the SEC and maybe negotiate a better settlement. So I think, you know, to the extent if you think that the SEC needed to be sort of reined in a little bit, I think the decisions like Kokesh and Liu and Jarkese may have done a good amount already. And so I think there's an argument and I think the justices seem to understand this that, well, you know, the position that Sripich is advocating for may go a bit too far. And, you know, Congress would probably come in and overrule what the Supreme Court did if it were to go with Sripich. From the oral arguments, it did seem like the SEC would win this one, but you never can tell. Thanks so much for joining me, Jim. That's Professor James Park of UCLA Law School. what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break. So whether it's geopolitics, energy, tech or markets, you're hearing it while it happens. It's smart, calm and to the point. And it fits into your morning. You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris. On Apple, Spotify, YouTube or wherever you get your podcasts. A federal judge rebuked U Health Secretary Robert F Kennedy Jr for causing quote chaos and terror by attempting to withhold federal funding for hospitals that provide gender care for minors Here what Kennedy testified to on April 17th before the House Education and Workforce Committee when presented with Republicans' concerns about gender-affirming surgeries. We have ended all federal funding for those kind of, for puberty blockers and gender mutilation surgeries. And we have instructed hospitals and medical centers around the country that if they do host those kind of interventions, that they will lose all their Medicaid and Medicare funding. Oregon federal judge Mustafa Kassobi, wrote in a scathing opinion that unserious leaders are unsafe. He said that Kennedy lacked legal authority to unilaterally and categorically supersede statewide standards of care governing gender-affirming care, blocking the HHS secretary from attempting to do so again. Quote, this case illustrates that when a leader acts without authority and in the absence of the rule of law, he acts with cruelty. Joining me is Ian Lopez, a senior reporter at Bloomberg Law. Tell us about this December announcement from HHS. Sure. So back in December, the HHS announced this kind of package of actions, if you will, that were aimed at scaling back access to gender affirming care, particularly for minors. One big component of that was a declaration from Secretary Kennedy, which basically said that providing gender affirming care for minors does not meet normal medical standards. The implication being that hospitals that receive federal funding would be in danger of losing that funding and that support should they continue providing those services. Now, this declaration, like I said, was one of a few different actions unveiled at the same time. It also went along with a few proposed rules from the Centers for Medicare and Medicaid services that kind of have the same effect. But the issue with the declaration, according to the states, at least, that brought the lawsuit, was that Secretary Kennedy should have gone through a more formal rulemaking process. That being, he should have actually proposed this idea of his and sent it out for the public to comment on. Did not do that. So nearly 20 states in the District of Columbia sued the HHS along with Kennedy and said that he violated these rulemaking norms. What was HHS's response to the state's complaint? Well, the HHS tried to have the lawsuit dismissed. They believe they were well within their authority to do so. They even actually note in this declaration that we're discussing that Kennedy's views, his position here actually supersedes state authority of how they're regulating this practice. The states, of course, disagreed, and the judge sided with the states on this. And the judge had initially issued this ruling from the bench, and then he issued a formal ruling. First of all, tell us about the ruling. So he decided that basically the actions that Kennedy took here with the declaration were unlawful, required the rulemaking process. And in doing so, he basically blocked the declaration from being effective. Now, what makes this a little bit more critical, though, is that in doing so, the judge noted that, hey, you know, I would not be surprised if the HHS tried to find a way to circumvent this ruling. So I'm going to vacate the declaration. And in the process, I'm also going to block the HHS from carrying out similar actions to this. And what constitutes is similar here is fairly broad. From what I'm hearing from legal experts is that that could be used to kind of essentially cut off the Trump administration from taking all sorts of actions that it's been trying to undertake around gender care. It was a scathing ruling. He said that unserious leaders are unsafe. This case illustrates that when a leader acts without authority in the absence of the rule of law, he acts with cruelty. Was there any specific evidence from the states about Kennedy's actions here? Well, if you look at the pattern around the case, the declaration is like one of many actions that have been carried out across the Trump administration for the since 2025, really. Right. Like the President Trump, I believe on his first day in office, actually issued an executive order going against not so much gender affirming care, but the recognition of anything beyond male and female as genders. And then from there, he issued another order for the government to scale back on gender care. And since then, we've seen investigations in the hospitals, threats of the inspector general taking action. And really, this kind of fits part and parcel with all of that. And part of the challenge here that the judges had to grapple with was the legality behind essentially Kennedy making this proclamation in the face of not only other more normal standards of care by a medical group, but also how states themselves have the authority to regulate this. As you mentioned, the judge said that the public statements and social media posts leave no room for doubt that defendants will attempt to circumvent this court's vacator of the Kennedy Declaration. Did he do anything that would stop HHS from continuing this? Well, the HHS can still go ahead and try to take other steps around this order. But the scope of the order, at least what I'm hearing from legal experts, is that it should also be applied to blocking those other efforts as well. The idea being that the states had requested not only relief against the declaration, but any similar actions along those lines. And what counts as similar can be fairly broadly interpreted. And this is something that will probably play out again should the HHS appeal as to what that scope might be. HHS said they'll continue to fight to protect our nation's children and blamed it on the judge being a Biden appointee with radical ideology. Are they going to appeal his decision? They haven't said, at least to us, yes, whether they're going to, but presumably they will. Now, the catch to that, though, is, of course, they do at times let things just drop because they have so many lawsuits out there and some of them just aren't going to work out here, obviously. But in this particular case, it's hard to say because, like we were saying, the applicability of this ruling, given how broad it is, I mean, it does really threaten to kind of scale back a lot of the actions that the administration has been doing since early 2025. I've heard that in New York, some hospitals have stopped the gender affirming care because of fear of the Trump administration pulling federal funding. I don't know. They might still be afraid of that even with this ruling. Right, right. And, you know, of course, the advocate camp here in reading this ruling is suggesting that hospitals should feel free to kind of go ahead and pursue this care again. They could kind of the chilling effect should be over. But as you've noted, you know, who knows what the next step might be from the Trump administration? Should they try something else? Should they appeal? Should this get halted while they appeal? It's really just a wait and see as to what the hospitals do as well. Thanks so much, Ian. That's Ian Lopez, Bloomberg Law Senior Reporter. This is Caroline Hyde. And I'm Ed Ludlow, inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation and the future of business. Every weekday, we bring you the top headlines from the world's biggest tech companies. From finance to defence, AI to entertainment and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets. We do this all every weekday, then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube, Apple, Spotify or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech Podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today, wherever you get your podcasts.
