A:

When the Securities and Exchange Commission (SEC) enforces a civil action against a corporation or an individual found guilty of violating SEC regulations, there's a good chance that some sort of fine will be imposed. The money from these fines goes back to investors who have been victims of securities law violations.

Monetary penalties levied by the SEC fall into two categories: civil money penalties and disgorgements. Civil penalties are usually fines paid by defendants found liable for damages to the state. In the past, civil money penalties went to the U.S. Department of the Treasury, which was apparently negatively affected by the wrongdoing of the party found liable. A civil money penalty is meant to be punitive, and its value will usually be similar to the monetary value of the individual or company's ill-gotten gains.

The second type of penalty is called a disgorgement. This penalty is a remedial civil action meant to restore the funds that were received through illegal or unethical business transactions with interest to those affected by the illegal activities. For example, when Martha Stewart sold ImClone (Nasdaq: IMCL) stock on non-public material information given to her by her broker, she was ordered to disgorge $45,673, the amount that Stewart would have lost had she not made the insider trade.

With the passing of the Sarbanes-Oxley Act in 2002, the courts gave the SEC the ability to distribute disgorgement money (plus interest judged owing on it) and civil money penalties received to the victims of securities law violations through the Fair Funds for Investors provision.

(For more information on white collar crime, see Handcuffs and Smoking Guns: The Criminal Elements of Wall Street and Defining Illegal Insider Trading.)

RELATED FAQS
  1. I made involuntary contributions to a retirement plan while temporarily employed. ...

    Your options depend on the type of penalty that would apply. If the penalty is a surrender charge or another penalty that ... Read Answer >>
  2. Are IRS penalties tax deductible?

    Learn about penalties assessed by the U.S. Internal Revenue Service and how the IRS does not taxpayers to deduct them on ... Read Answer >>
  3. Does the IRS charge interest on penalties?

    Understand whether or not the IRS charges interest on penalties. Learn about the types of penalties that can be assessed ... Read Answer >>
  4. Who are the most famous people convicted of insider trading?

    Learn about some famous people who were convicted of illegal insider trading and find out about the reasons for their criminal ... Read Answer >>
  5. How often should I measure my company's key performance metrics (KPIs)?

    Learn the definition of illegal insider trading while reviewing the people who can be involved and the regulations and consequences ... Read Answer >>
Related Articles
  1. Insights

    Understanding the SEC

    The SEC's triple mandate of investor protection, maintenance of orderly markets and facilitation of capital formation makes it a vital player in capital markets.
  2. Investing

    The 3 Biggest Penalties for Insider Trading in the U.S.

    The three large penalties for insider trading in the United States have been handed down in recent years, leading to civil and criminal charges for the culprits.
  3. Personal Finance

    Policing The Securities Market: An Overview Of The SEC

    Find out how this regulatory body protects the rights of investors.
  4. Investing

    Legal Risk Study: XLB, How Much Fines Have Component Companies Paid?

    Discover three component companies in the Materials Select Sector SPDR Fund that have had fines imposed, and learn why the companies received penalties.
  5. Personal Finance

    What's the SEC?

    The Securities and Exchange Commission (SEC) is an independent agency of the United States government. The mission of the SEC is to enforce securities laws passed by congress. These laws aim ...
  6. Financial Advisor

    Series 66 Exam Prep: The Broker-Dealer

    Before you take the series 66, you need to understand civil liabilities.
  7. Investing

    Explaining Insider Trading

    While often associated with illegal activity, insider trading actually encompasses both illegal and legal trading of securities.
  8. Investing

    Legal Risk Study: XLF, Top 3 Components With Legal Fines (GS, C)

    Discover three component companies in the Financial Select Sector SPDR ETF that have had fines imposed. Learn why the companies received penalties.
  9. Insights

    Why Insider Trading Is Bad for Financial Markets

    Insider trading can come in many forms, some of them even legal, with the benefits and costs often debated by practitioners and academics alike.
  10. Investing

    Infamous Insider Traders

    Check out these bizarre insider trading cases that helped define the SEC's laws against it.
RELATED TERMS
  1. Disgorgement

    A repayment of ill-gotten gains that is imposed on wrong-doers ...
  2. Civil Money Penalty - CMP

    A punitive fine imposed by a civil court on an entity that has ...
  3. Fair Funds for Investors

    Provision introduced in 2002, under Section 308(a) of the Sarbanes-Oxley ...
  4. Insider Trading Sanctions Act Of 1984

    Legislation that allows the SEC to seek a civil penalty, of up ...
  5. Securities And Exchange Commission - SEC

    A government commission created by Congress to regulate the securities ...
  6. Civil Rights Act of 1964

    Landmark federal legislation that prohibits discrimination on ...
Hot Definitions
  1. Foreign Exchange Reserves

    Foreign exchange reserves are reserve assets held by a central bank in foreign currencies, used to back liabilities on their ...
  2. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that decreased and eventually eliminated tariffs to encourage economic activity ...
  3. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  4. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  5. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  6. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
Trading Center