Disgorgement

Key Takeaways

• Disgorgement is a legal statute that seeks to make whole those harmed financially by returning ill-gotten funds from the wrongdoer to the harmed parties.
• This sort of civil action seeks to prevent unjust enrichment and is often enforced by regulatory bodies such as the SEC.
• In practice, fair and full disgorgement is hard to come by, since the institutional set-up encourages the privatization of gains while socializing losses.

What Is Disgorgement?

Disgorgement is the legally mandated repayment of ill-gotten gains imposed on wrongdoers by the courts. Funds that were received through illegal or unethical business transactions are disgorged, or paid back, often with interest and/or penalties to those affected by the action.

Disgorgement is a remedial civil action, rather than a punitive civil action. That means it seeks to make those harmed whole rather than to excessively punish wrongdoers.

Understanding Disgorgement

Disgorgement is often used in civil cases about securities fraud, insider trading, accounting misconduct, or breaking anti-corruption laws like the Foreign Corrupt Practices Act (FCPA). Courts can require defendants to pay back profits from the misconduct, sometimes along with other financial penalties.1

2017 – Kokesh v. SEC: The U.S. Supreme Court ruled that disgorgement, as applied by the Securities Exchange Commission (SEC) at the time, functioned as a penalty and was therefore subject to a five-year statute of limitations.2

2020 – Liu v. SEC: The Court reaffirmed that disgorgement may be permitted as equitable relief, but only when it is limited to net profits and awarded for the benefit of victims.3

2021 – Congressional Action: Congress explicitly authorized the SEC to seek disgorgement through legislation, extending the statute of limitations to 10 years for certain scienter-based violations, such as fraud. Scienter-based means liability depends on proving intent or knowing misconduct, not merely a mistake or oversight.

These changes have made the rules for calculating disgorgement more specific, while also giving regulators more power to seek it.

Examples of Disgorgement in Practice

In 2010, Goldman Sachs agreed to a $550 million settlement with the SEC related to disclosures surrounding a mortgage-linked investment product tied to subprime loans. The settlement included both disgorgement and penalties, reflecting the regulator’s view that investors had been misled about material risks associated with the product.4