A Supreme Court decision on Monday restricts the SEC's seizure authority in fraud cases. The 8-1 ruling requires the agency to recover net profits only, not gross revenues, when pursuing enforcement a
A Supreme Court decision on Monday restricts the SEC's seizure authority in fraud cases. The 8-1 ruling requires the agency to recover net profits only, not gross revenues, when pursuing enforcement against crypto startups and ICO promoters.
The court upheld the SEC's use of disgorgement but imposed limits: the SEC must pay wronged investors only, and the agency cannot combine disgorgement with penalties in the same case. Justice Sonia Sotomayor wrote the majority opinion, which originated from a 2016 civil case the SEC brought against a California couple.
The financial impact is substantial. The SEC collected $1.5 billion in disgorgements and penalties but distributed only $1.2 billion to harmed investors in its most recent full fiscal year. The Supreme Court addressed that gap directly.
The crypto industry felt this through enforcement targeting ICOs. Since 2017, when the SEC ruled that DAO tokens are securities, the agency pursued disgorgement against ICO founders. The 2017 SEC report signaled that unregistered token sales would trigger enforcement action. This limits how the SEC operates going forward.
Thomas Gorman, formerly senior counsel in the SEC's Division of Enforcement, called it a needed correction. "Since Congress has given the SEC specific authority to impose a penalty, this meant that in many instances the Commission imposed double penalties – disgorgement and a statutory penalty. That was beyond unfair," he said. "The ruling eliminates that unfairness returning much-needed balance and fairness to the remedy process in SEC enforcement cases."
Jake Chervinsky, general counsel at Compound Finance, disagreed on the significance. "The SEC was already in the habit of seeking disgorgement in civil actions and here the Supreme Court upheld their authority to do so. This shouldn't change their behaviour at all," he explained.
