Disgorgement

Disgorgement is distinct from a civil monetary penalty. A penalty is a punitive sanction that exceeds the amount of actual ill-gotten gains and is intended to punish and deter. Disgorgement is instead a remedial measure that simply restores the status quo ante by removing the profits the defendant should never have had in the first place. In practice, disgorgement and penalties are often imposed together in SEC enforcement actions, with the total amount representing both the forfeiture of gains and a punitive premium.

The calculation of disgorgement requires identifying the profits that are causally connected to the violation. In insider trading cases, this is typically the profit realized from trading on material non-public information — computed as the difference between the price at which the defendant traded and the price that prevailed after the information became public, multiplied by the number of shares traded. In accounting fraud cases, disgorgement may be measured as executive compensation received during the period of the fraud. In broker-dealer misconduct cases, it may equal the fees or markups collected through the deceptive conduct.

Disgorgement in SEC civil actions must be accompanied by prejudgment interest — interest calculated at the IRS underpayment rate from the date of the violation through the entry of judgment — to account for the time value of money and ensure that the defendant does not benefit from the delay between the violation and the judgment.

The Supreme Court's 2020 decision in Liu v. SEC significantly shaped the law of disgorgement in SEC proceedings. The Court held that the SEC retains authority to seek disgorgement in civil actions under its general equity powers, but limited disgorgement to net profits — meaning that legitimate business expenses incurred in connection with the violation may be deducted. The Court also held that disgorgement must generally be deposited into a fund for distribution to harmed investors rather than retained by the Treasury as a penalty.

Disgorged funds are frequently distributed to harmed investors through the Fair Fund mechanism established by the Sarbanes-Oxley Act. The SEC administers Fair Funds — distribution mechanisms that aggregate disgorgement and penalties paid by defendants and distribute them to injured investors through court-approved distribution plans. Fair Fund distributions have returned billions of dollars to investors in major enforcement cases.

For individuals and entities subject to SEC investigations, understanding the scope and calculation of potential disgorgement is central to evaluating settlement terms and litigation strategy.