Disgorgement Explained: Legal Remedy for Illegal Profits

In legal terms, disgorgement is an action where something is given up – namely, profits – because they have been obtained illegally or unethically. The court system orders the individual or entity to give up such profits to prevent them from making unfair financial gains. Disgorgement is not a form of punishment, but instead, is merely a solution or correction of unfair practices.

Disgorgement in Securities Trading

Disgorgement is used heavily as a remedy in terms of U.S. securities law, forcing companies (or individuals) to repay any monies earned through illegal and dishonest means. It happens when the company or individual is found to have violated regulations put forth by the Securities and Exchange Commission (SEC)Securities and Exchange Commission (SEC)The US Securities and Exchange Commission, or SEC, is an independent agency of the US federal government that is responsible for implementing federal securities laws and proposing securities rules. It is also in charge of maintaining the securities industry and stock and options exchanges.

Any profits garnered from embezzlement, insider trading, and other illegal actions violate the Foreign Corrupt Practices Act (FCPA) and are subject to disgorgement.

Example of Disgorgement

The Supreme Court case of Kokesh vs. SEC ruled that the disgorgement penalty comes with a five-year statute of limitations. In this case, the SEC sued Charles Kokesh, stating that he violated securities law by “misappropriating funds” from a number of businesses. The court ruled in the SEC’s favor.

Kokesh appealed the ruling, stating that the charges were brought more than five years after the accrual of the claims. His appeal was denied, with higher courts ruling that because the disgorgement was remedial, not punitive. Kokesh was then required to return the $34.9 million he earned as a result of misappropriation of the funds from four business development businesses.

Remedial vs. Punitive Action

Disgorgement is supposed to be viewed as remedial action instead of being used as a punishment. According to the Securities Exchange Act of 1934, disgorgement is supposed to take away a wrongdoer’s ill-gotten gains and to serve as a warning to any entity that attempts to effectively steal from others or to profit in a way that is unethical.

Disgorgement is considered an equitable remedy, not a punitive action. It is not designed to punish, but to act as a tool for justice, requiring illegally obtained gains to be returned. It means that – in order to be equitable and not punitive – the SEC can only recover the approximate amount that was earned illegally or unethically. Seeking interestSimple InterestSimple interest formula, definition and example. Simple interest is a calculation of interest that doesn't take into account the effect of compounding.  In many cases, interest compounds with each designated period of a loan, but in the case of simple interest, it does not.  The calculation of simple interest is equal to the principal amount multiplied by the interest rate, multiplied by the number of periods. or additional payment would make the disgorgement punitive.

Offenders generally view disgorgement as a punishment, while the offended and the SEC see disgorgement as a vehicle by which they can repair damages done. The offending party widely sees the action as a form of punishment for their illegal or unethical actions. For now, disgorgement is labeled a remedial action and is designed to put ill-gotten gains back into the appropriate hands.

Related Readings

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