The Cato Institute and others have come out in support of a call for the U.S. Supreme Court to resolve a circuit split over the U.S. Securities and Exchange Commission's disgorgement powers, saying a recent Ninth Circuit decision unlawfully delegates legislative power to executive officials.

Cato filed a brief Monday in a case involving a $2 million disgorgement order from the SEC against a man accused of participating in a $6 million pump-and-dump scheme, saying the justices should review the Ninth Circuit's recent ruling in the case to prevent the agency's "overbroad assertion of legal authority from upsetting constitutional separation of powers and violating due-process rights."

The defendant in the SEC matter, Ongkaruck Sripetch, last month asked the high court to resolve a two-to-one split over whether the SEC can demand defendants disgorge their ill-gained profits, even if the agency cannot prove investors suffered monetary losses due to the defendants' actions.

The Ninth Circuit acknowledged the split in issuing its ruling, siding with the First Circuit in reasoning that the SEC does not need to show pecuniary harm to fraud victims in order to demand disgorgement from those who allegedly committed the fraud. That butts up against a Second Circuit decision in 2023 that reached the opposite conclusion, the Ninth Circuit said.

Cato argues the issues presented in Sripetch's suit are "ripe for review" and that the court should reaffirm three "bedrock principles of constitutional order" — that an executive agency may only exercise powers clearly granted to it by Congress, that Americans' due process rights entitle them to fair notice of the law, and that "the prospect of selective law enforcement justifies narrowly construing even powers explicitly granted to executive agencies."

The institute further contends that allowing the Ninth Circuit's ruling to stand would broadly interpret disgorgement and unlawfully delegate legislative power to executive officials.

"Failure to provide a discernible principle grants the SEC unchecked discretion to selectively enforce penalties against foes and pocket the proceeds," the brief states.

The California Alternative Investments Association, also known as CalALTs, and three appellants in another case pending before the Ninth Circuit also filed amicus briefs.

CalALTs says the Ninth Circuit's decision "heightens the stakes" for asset promoters and managers by transforming the typical equitable remedy of disgorgement into something closer to a punitive remedy.

"Sanctioning the SEC's disgorgement authority without a finding of pecuniary harm will produce inequitable and destabilizing consequences, including chilling innovation in the alternative investment sector, which will deprive U.S. investors of novel investment opportunities," the association's brief states.

Keri Curtis Axel of Waymaker LLP, who represents CalALTs, told Law360 on Wednesday, "There is no doubt that SEC policies such as pursuing disgorgement in strict liability registration cases where no investor has been harmed have chilled growth in the United States in alternative investments, like crypto."

The other brief was filed by three appellants in U.S. Securities and Exchange Commission v. Barry et al . The suit claims that a group of Pacific West Capital Group Inc. agents sold unregistered securities and didn't properly register as broker-dealers.

According to the agents' Tuesday brief, shortly before its ruling in Sripetch's case, the Ninth Circuit approved a disgorgement award against them based on the "abstract theory" that "investors inherently suffer pecuniary harm through the 'loss of the time value of their money' whenever funds are invested in an unregistered offering, regardless of whether they ultimately recoup their principal or even profit."

The agents argue the ruling in their case allows disgorgement as a "de facto penalty" for technical violations of federal securities laws and ignores the equitable principle that disgorgement must be "for the benefit of investors."

Therefore, they urge the Supreme Court to take up Sripetch's case to resolve the current circuit split and clarify what constitutes as the requisite pecuniary harm.

In a statement to Law360 on Wednesday, Nicholas Morgan of Investor Choice Advocates Network, who represents the Pacific West Capital Group agents, said the SEC keeps trying to revive the theory of "victimless disgorgement," which the Supreme Court has already rejected.

"When investors haven't lost a single dollar, the SEC has no business demanding massive financial judgments disguised as equity. The court should step in and put an end to it," he said.

The circuit split has opened in the wake of the Supreme Court's 2020 decision in Liu v. SEC , in which the justices ruled that the agency may seek disgorgement so long as the amount awarded does not exceed a wrongdoer's net profits.

In upholding a lower court's ruling in favor of the disgorgement order against Sripetch, the Ninth Circuit said Liu did not require it to find pecuniary harm because disgorgement is "grounded in the principle" that a person cannot keep their ill-gotten gains.

But Sripetch, echoing the Second Circuit, tells the justices in his petition Liu emphasized that disgorgement was about returning money to victims of an alleged fraud.

"[A]n investor who lost nothing is owed nothing," he says.

The SEC declined to comment Wednesday, and counsel for the other parties did not immediately respond to requests for comment.

The Cato Institute is represented by H. Hunter Bruton, John L. Gibbons and Noel Hudson of Smith Anderson Blount Dorsett Mitchell &Jernigan LLP.

The California Alternative Investments Association is represented by Keri Curtis Axel, Becky S. James and Viviana Andazola Marquez of Waymaker LLP.

The Pacific West Capital Group agents are represented by Nicholas Morgan of Investor Choice Advocates Network, and Igor V. Timofeyev, Alyssa K. Tapper and Alexander Sweet of Paul Hastings LLP.

Sripetch is represented by Daniel Geyser and Michael Qian of Haynes Boone, and Kenneth White and Tyler Creekmore of Brown White & Osborn LLP.

The SEC is represented by D. John Sauer of the Solicitor General's Office.

The case is Sripetch v. SEC, case number 25-466, in the Supreme Court of the United States.