It’s not often that the Supreme Court addresses securities enforcement law, which is why public companies, senior executives, and the directors and officers liability (D&O) insurance community should take note of its recent grant of certiorari in Securities Exchange Commission v. Sripetch.
The issue before the court is: Can the SEC seek disgorgement — or the return of ill-gotten gains — from alleged securities law violators without demonstrating that investors have suffered pecuniary (i.e., financial) harm?
Insurers and their insureds frequently find themselves debating the concept of disgorgement — and the court’s answer to that question could have meaningful implications for D&O coverage.
A circuit split
The Sripetch case relates to an SEC civil enforcement action against 15 individuals for a “pump-and-dump” scheme involving at least 20 penny-stock companies that yielded more than $6 million in illicit proceeds for the group. The SEC contends that the scheme harmed retail investors who bought shares of the companies as the scheme played out.
One of the individuals, Ongkaruck Sripetch, was charged with several counts of securities fraud and one count of selling unregistered securities. The SEC sought various remedies, including forcing Sripetch to surrender, or “disgorge,” any gains obtained through the misconduct.
The SEC asked the trial court to order more than $4.1 million in disgorgement, which Sripetch opposed. He argued that disgorgement requires proof that investors suffered financial harm, and that the SEC had not made that showing.
The U.S. District Court for the Southern District of California ultimately ordered approximately $2.5 million in disgorgement plus $1 million in interest. Although the district court did not rule on whether disgorgement requires proof of pecuniary harm, it found that the SEC had demonstrated harm in this case. Sripetch appealed the decision to the 9th Circuit, which affirmed the decision in a ruling issued in September 2025.
In its ruling in Sripetch (opens a new window), the 9th Circuit aligned with a 2024 decision by the U.S. 1st Circuit Court of Appeals, SEC v. Navellier & Associates, which held that the SEC need not show pecuniary harm by investors to secure disgorgement awards. This runs counter to a 2023 ruling by the 2nd Circuit, SEC v. Govil, which cited the Supreme Court’s 2023 decision in Liu v. SEC (opens a new window), for the premise that disgorgement, as an equitable remedy rather than a penalty, requires the SEC to demonstrate that victims suffered actual pecuniary harm as a result of the alleged violation.
Interestingly, the SEC concurred with Sripetch that this issue warranted clarification from the Supreme Court, which agreed on Jan. 9 to hear the case this term.
Potential implications for D&O insurance
In fiscal year 2025, which ended Sept. 30, 2025, the SEC collected $108 million in disgorgement and prejudgment interest (opens a new window), the lowest amount in any fiscal year since at least 2010, according to Cornerstone Research. One possible explanation for these depressed recoveries is the uncertainty created by the Liu circuit split.
A ruling supporting the SEC’s position, however, could increase exposure for companies and individuals subject to SEC oversight. For example, the SEC could be emboldened to bring more enforcement actions and seek disgorgement more regularly, even in situations where no harm to investors is alleged.
Conversely, a ruling that the SEC must show pecuniary harm before seeking disgorgement would be a win for public companies, individual insureds, and D&O underwriters alike. That could lead to fewer SEC enforcement actions and even less in disgorgement recoveries, further altering an already inconsistent regulatory strategy at the agency.
Although Sripetch does not directly deal with insurance, the Supreme Court’s ruling in the case could also have follow-on insurance coverage implications, notably for D&O coverage.
Broadly speaking, D&O policies pay “loss” on behalf of individual directors and officers and the companies they serve if that “loss” stems from covered “claims.” “Loss” is usually a defined term; many policies’ definition of “loss” explicitly state that “disgorgement” or “restitution” is not “loss.” But the term “disgorgement” itself is typically not defined.
This ambiguity can result in disputes between insureds and insurers as to whether an amount attributable to a claim is actually disgorgement, and therefore not covered, versus some other monetary amount that would be a covered loss, like compensatory damages or settlement amounts.
Insurers commonly assert that because disgorgement entails the returning of funds that were never rightfully an insured’s in the first place, it is uninsurable as a matter of public policy. Level 3 Communications v. Federal Insurance, a 2001 ruling by the 7th U.S. Circuit Court of Appeals, is a leading authority on this point, as it established that insurance is intended to protect against actual financial harm or true losses, and not to serve as a means by which an insured retains the fruits of alleged fraudulent activity.
While it remains to be seen which way the Supreme Court will rule in Sripetch on the relatively narrow issue before it, the court’s written opinion and the justices’ reasoning behind it could influence this tangential coverage issue of the scope and insurability of disgorgement.
Sripetch could also play a role in future disputes involving other forms of third-party liability insurance, including employment practices liability, fiduciary liability, errors and omissions/professional liability, and cyber insurance, all of which may utilize a similar “not loss” stance with respect to disgorgement. Other issues the court’s ruling could influence include:
How insurers interpret enforcement actions by regulators other than the SEC.
How policy definitions and other provisions are drafted in the future.
Market behavior, in the event insurers seek to add specific disgorgement exclusions to their policies.
What you can do now
The Supreme Court is likely to take several months to issue its decision, although one is expected before the current term ends in June. Companies and senior leaders should watch for updates on the ruling while also preparing for the above scenarios, in consultation with trusted risk advisors and legal counsel.
Organizations should also work with their insurance brokers to review current policies. Specifically, it’s important to understand what the D&O policy’s definition of “loss” includes or excludes, and whether current policies explicitly or implicitly address disgorgement and restitution in any way.
From there, a broker should be able to advise whether any improvements to policy wording may be possible via negotiations with underwriters, and whether insurers are adding exclusions or otherwise seeking to narrow terms.
Lockton’s Professional & Executive Risk team will monitor the Supreme Court’s proceedings in Sripetch and provide updates to help organizations ensure they have effective D&O insurance coverage. For more information and insights, contact your Lockton representative or visit our D&O webpage here (opens a new window).
