Disgorgement

Disgorgement is repayment of ill-gotten gains that is imposed on wrongdoers by the courts. Funds that were received through illegal or unethical business transactions are disgorged, or paid back, with interest to those affected by the action. Disgorgement is a remedial civil action, rather than a punitive civil action.

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.

In the aftermath of the financial crisis, many sought additional disgorgements from financial institutions intimately involved in the 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.