Disgorgement

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 punitive civil action. That means it seeks to make those harmed whole rather than to excessively punish wrong-doers.

Key Takeaways

  • Disgorgement is a legal statute that seeks to make whole those harmed financially by returning ill-gotten funds from the wrong-doer to the harmed parties.
  • This sort of civil action seeks to prevent unjust enrichment 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.

Understanding Disgorgement

Individuals or companies that violate Securities and Exchange Commission (SEC) regulations are typically required to pay both civil money penalties and disgorgement. Proceeds from insider trading, embezzlement, or illegal actions under the Foreign Corrupt Practices Act (FCPA) are subject to disgorgement. In June 2017, a unanimous ruling by the U.S. Supreme Court in the case of Kokesh v. SEC clarified that disgorgement is a penalty that is subject to a five-year statute of limitations.

However, disgorgement payments are not only demanded of those who violate securities regulations. Anyone profiting from illegal or unethical activities may be civilly required to disgorge their profits. In 2010 Lloyd Blankfein, CEO of Goldman Sachs, put on an aggressive facade to avoid a lawsuit brought forth by the SEC for his bank's role in selling a complex financial instrument tied to subprime mortgages to investors. It was alleged that Goldman Sachs withheld significant material disclosures about the nature of the financial instrument (known as Abacus 2007-AC1) that they pushed on their unsuspecting clients. Perhaps realizing that his bank would lose in the lawsuit, Blankfein decided to settle with the SEC, paying a record $550 million in disgorgement and penalties.

Privatizing Gains vs. Socializing Losses

In the aftermath of the financial crisis, many sought additional disgorgements from financial institutions intimately involved in creating the crisis and from the CEOs, directors, and other executives leading them. However, these individuals, in the end, were allowed to "privatize" their gains and "socialize" (i.e., dump on taxpayers) the losses of the institutions. With friends in high places, Blankfein, Jamie Dimon, John Thain, John Mack, Ken Lewis, Vikram Pandit, and a rash of others were able to skate away with their multimillion-dollar bonuses.

The phrase privatizing profits and socializing losses has a number of synonyms, including "socialism for the rich, capitalism for the poor". Another likens it to lemon socialism. The latter was coined in a 1974 New York Times op-ed about New York State's decision to buy two half-finished power plants from the struggling electric utility ConEd for $500 million, using taxpayer dollars to spread out the cost of the losing venture.

Article Sources
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  1. U.S. Securities and Exchange Commission. "Investor Bulletin: The Foreign Corrupt Practices Act – Prohibition of the Payment of Bribes to Foreign Officials," Page 3. Accessed Sept. 21, 2021.

  2. Supreme Court of the United States. "Kokesh v. Securities and Exchange Commission," Pages 1-3. Accessed Sept. 21, 2021.

  3. U.S. Securities and Exchange Commission. "Goldman Sachs to Pay Record $550 Million to Settle SEC Charges Related to Subprime Mortgage CDO." Accessed Sept. 21, 2021.

  4. The New York Times. "Deciding On Utilities: Public or Private?;" Accessed Sept. 21, 2021.

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