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Understanding disgorgement

On Behalf of | Nov 5, 2023 | FINRA And SEC Investigations

When a person or organization is found guilty of obtaining funds through illegal or unethical means, the consequences can include fines and other sanctions and even prison time. They’re typically required to “disgorge” or repay the money they improperly received (often referred to as “ill-gotten gains”). 

Often, this disgorgement is accompanied by interest and other penalties to be paid to those who were victimized. Disgorgement isn’t intended to be a punishment. It’s only meant to make those who lost money whole.

Many Securities and Exchange Commission (SEC) investigations result in disgorgement orders. It’s often used for illegal insider trading cases as well as violations of the Foreign Corrupt Practices Act (FCPA).

A well-known and record-setting amount was paid by the former CEO of Goldman Sachs, Lloyd Blankfein. He was ordered to pay some $550 million in disgorgement and penalties after he settled his case with the SEC over the subprime mortgage crisis.

How is disgorgement calculated?

In many cases, there isn’t a clearly calculable dollar amount that victims have lost – particularly if there are multiple victims or in complex cases. There’s no one formula used by the SEC to calculate disgorgement. The agency needs to determine how much of a business’s or individual’s profit was “ill-gotten gains” – in other words, came from illegal activity — and show the causal link between the illegal activity and that profit. 

Typically, courts give the SEC a good amount of leeway in calculating the amount of disgorgement owed. In one insider trading case, the court ruled that it need only be a “reasonable approximation of the profits which are causally connected to the violation.” 

A defendant has the right to dispute the amount of disgorgement ordered. This generally involves disputing the causal connection cited by presenting their own evidence. Having experienced legal guidance through this process is crucial.