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Disgorgement is defined by Black's Law Dictionary as "the act of giving up something (such as profits illegally obtained) on demand or by legal compulsion".[1]

Disgorgement is a remedy or penalty used in U.S. securities law; for example, disgorgement of short-swing profits is the remedy prescribed by § 16(b) of the Securities Exchange Act of 1934.[2]

American Jurisprudence, Second Edition states that:

Disgorgement is an equitable remedy designed to deter future violations of the securities laws and to deprive defendants of the proceeds of their wrongful conduct. Indeed, in the exercise of its equity powers, the district court may order disgorgement of profits acquired through securities fraud. Disgorgement takes into account the fact that the issuance of an injunction, by itself, does not correct the consequences of past activities. This remedy may also be imposed if the court believes that a defendant should not profit from his or her wrong, but equitable considerations indicate that an injunction should not be granted.[3]

In 2013, a scholarly article argued that while US courts begin their disgorgement analysis with the assumed premise that disgorgement is equitable, at least some of the time, disgorgement is not equitable and is more properly characterized as a “remedy at law” or penalty.[4]

The question of whether disgorgement is an equitable remedy, rather than in fact a punitive remedy, was brought into question in the U.S. Second Circuit case of SEC v. Contorinis in 2014.[5] There, Contorinis earned $427,000 from illegal trades, but the District Court ordered Contorinis to disgorge the fund’s $7,260,000 profits (plus another $2,485,000 in prejudgment interest)—a total of $10 million.[5] If disgorgement were an equitable remedy which should disgorge from the defendant the amount of his gain, as noted by Judge Denny Chin in dissent: “[d]isgorgement thus should have the effect of returning a defendant to his status quo prior to the wrongdoings … Instead of returning Contorinis to his status quo prior to his wrongdoings, the district court’s disgorgement order penalized him by requiring him to pay an amount equal to the $7.2 million in profits earned by the fund and an additional $2.5 million in prejudgment interest.”[5]

In Kokesh v. SEC, 137 S. Ct. 1635 (2017), the US Supreme Court unanimously disagreed with the SEC’s view that disgorgement in that case was remedial, holding that disgorgement payments to the SEC in that case were penalties.[6] The decision raised the question of whether the SEC's power to order disgorgement derives only from statute, and therefore congressional action would be necessary for the SEC to pursue disgorgement orders in federal court, and whether the amounts awarded should be limited to actual profits gained.[4] Following Kokesh, the SEC has argued in district courts throughout the US that outside of the Kokesh the statute of limitations context, disgorgement is not a penalty but is instead an equitable remedy.[7]

Disgorgement is a remedy for violations of the U.S.'s Commodity Exchange Act. The purpose of such a remedy, as in securities cases, is "to deprive the wrongdoer of his or her ill-gotten gains and to deter violations of the law".[8] However, in such cases, the court may only order disgorgement up to "the amount with interest by which a defendant profited from his or her wrongdoing".[8]

Disgorgement payments to the SEC have for decades been considered completely equitable and compensatory, and therefore deductible under the US Internal Revenue Code (IRS).[7][9] The December 2017 U.S. tax reform law provided that to be deductible, such payments will have to be identified in the relevant court order or settlement agreement as serving one of a number of specific purposes, and the appropriate government official must report to the IRS the total amount of the payment as well as the amount of the payment that constitutes restitution or the amount paid to come into compliance with law.[7] The new law adds Section 6050X, which requires the government to file an IRS information return setting out any amount paid (over $600) in a suit or agreement, to or at the direction of, the government in relation to the violation of any law, which must set forth any amount that constitutes: any amount that constitutes restitution or remediation.[10][10]

Commentators have suggested that the SEC "has good reason to" report such amounts as restitution, give that to "preserve its ability to recover disgorgement, the SEC may be willing to distinguish disgorgement payments from penalties by identifying them as restitution in settlement agreements".[7]

See alsoEdit


  1. ^ Black's Law Dictionary (10th ed. 2014: Bryan A. Garner, ed.) p. 568.
  2. ^ Francis C. Amendola et al., 69A American Jurisprudence (2d ed.) Securities Regulation—Federal, § 1308 (citing 15 U.S.C.A. § 78p(b)).
  3. ^ Francis C. Amendola et al., 69A American Jurisprudence (2d ed.) Securities Regulation—Federal, § 1616 (footnotes omitted).
  4. ^ a b "Chronicle of Disgorgement's Death Foretold: Kokesh v. SEC"
  5. ^ a b c "Disgorgement in the Second Circuit: Equitable Relief or Punishment?" | The National Law Review
  6. ^ "Supreme Court Decision Forces Resolution of SEC-IRS Conflict on Disgorgement" - Lexology
  7. ^ a b c d Jones Day | "New Tax Bill Will Rewrite Rules for Deducting Disgorgement Payments to SEC"
  8. ^ a b Marie K. Pesando, 73 American Jurisprudence (2d ed.) Stock and Commodity Exchanges § 22 (footnotes omitted).
  9. ^ [SEC Enforcement Manual § 3.1.2 (October 28, 2016).]
  10. ^ a b "Tax Reform Taxation Settlements"