The U.S. Supreme Court limited the power of the Securities and Exchange Commission to recoup illegal profits from wrongdoers, putting new curbs on one of the agency’s most potent legal weapons.

The 8-1 ruling Monday preserved the SEC’s power to win “disgorgement” in federal court so long as the money is used to reimburse defrauded investors and doesn’t exceed the wrongdoer’s net profits. But the court also suggested that federal law bars awards from going further, blunting a legal tool that critics say the agency has abused.

The SEC typically wins more than $1 billion a year in disgorgement orders in federal court. Disgorgement is a traditional tool used by judges to return wrongful gains to the victims. It’s distinct from SEC fines, which the agency is allowed to use as punishment.

Writing for the court, Justice Sonia Sotomayor said Congress had prohibited the SEC from seeking disgorgement “in excess of a defendant’s net profits from wrongdoing.” She said courts must subtract “legitimate expenses” before ordering disgorgement.

The ruling is a partial victory for a California couple ordered to pay $27 million after being found to have defrauded investors.

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Sotomayor also said disgorgement awards must be geared toward compensating investors, rather than simply stripping wrongdoers of their profits. She said it was an “open question” whether the SEC can deposit recouped money in the Treasury when it’s not feasible to distribute it to investors.

Disgorgement “must do more than simply benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains,” she wrote.

In addition, Sotomayor suggested that awards generally must track individual wrongdoing and not try to make one wrongdoer give back benefits an associate received.

Although federal law doesn’t explicitly say the SEC can seek disgorgement, the 2002 Sarbanes-Oxley Act says judges hearing SEC enforcement actions can award “any equitable relief” they deem appropriate to protect investors. Courts have traditionally viewed disgorgement as an “equitable” measure, which means judges make awards based on fairness rather than strict legal rules.

The ruling “will provide defendants strong ammunition for battling back against the SEC’s tendency to seek aggressive disgorgement remedies,” said Howard Fischer, a former SEC trial lawyer and now a partner at Moses & Singer in New York.

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