Disgorgement

Disgorgement refers to the legal proceedings of forcing someone to give up anything obtained by them illegally or using unethical means. It serves the purpose of redressing the injustice committed by the wrongdoer onto the victim to restore their losses.

It finds usage in fraud, anti-trust violations, contract breaches, and security violations. Disgorgement enables the court to order the return of illicit gains to the victim from the encroacher. It also comes as a preventive action concerning unjust enrichment when only one party derives all the benefits. It has been the most powerful tool in deterring wrongdoers in the civil justice system.

• Disgorgement involves the legal process of compelling individuals to relinquish anything acquired through illegal or unethical methods. 
• Its primary objective is to rectify the harm caused by the wrongdoer and restore the losses suffered by the victim.
• Disgorgement pressurizes the wrongdoer to leave the illegal gains made by them as per the court's order, while restitution makes the person enriched wrongfully return any benefits obtained to the victim.
• Disgorgement acts as a remedy to correct the wrongdoers' harm done to the victims, while forfeiture is regarded as a legal measure taken against offenders.

Disgorgement is a legal remedy conferred upon the wrongdoers to return all the profits or gains they obtained from illegal or unlawful acts. By doing so, it tries to balance the injustice meted out to the victims of the illegal activity of the wrongdoer.

The victim applies in the court to seek justice for the wrongdoer's activities, enabling them to gain illegally from their investment or asset. The court then admits the plea of the aggrieved party and orders a thorough probe into the violations of illegal activities. If it finds any proof of embezzlement, illegal activity, breach of contract, or unethical means, it orders the disgorgement of profits the wrongdoer got by ill means. 

The penalty awarding court calculates the disgorged amount per the profits from the illegal activities. It acts as a justice restoration mechanism. It thwarts any future wrongdoings by any future individual or entity by taking out monetary incentives. It promotes the compliance of rules and regulations by everyone.

It poses difficulty in calculating the disgorgement amount accurately. Victims may never receive full compensation for the disgorgement amount. It may punish innocent employees, shareholders, or investors negatively. It can end up as a double punishment for some.

 It helps avoid insider trade of securities in the market. Hence, it promotes transparency and maintains the integrity of the financial world. Consequently, it retains and builds on the confidence and safety of investors and consumers. In some instances, companies may get disincentivized to undertake innovation owing to the risks contained.

A strong compliance system place helps in its prevention. Another way is to not engage in unlawful conduct or activity. Also, appropriate awareness of the ill effects of unlawful activities is necessary. Public naming and shaming of wrongdoers by the regulatory bodies must also come into effect for its avoidance.

Therefore, disgorgement constitutes a strong judicial remedy that promotes justice by compelling wrongdoers to forfeit illicit earnings, deterring financial misbehavior, and preserving the honesty of the financial system.

Let us use a few examples to understand the topic clearly.

Example #1

In a real-life case, the Securities and Exchange Commission (SEC) directed Fabrice Tourre, a former Goldman Sachs executive, to surrender $6.3 million in earnings from selling mortgage-backed securities. Tourre faced allegations of deceiving investors about the risks linked to the securities, leading to their collapse and the 2008 financial crisis. As per the order of SEC disgorgement, Tourre had to repay the profits he acquired from the securities' sale and interest.

Example #2

In a hypothetical scenario, a business involved in insider trading may be obligated to reimburse the gains from the unlawful activity. For example, suppose an insider of the company uses undisclosed information about an upcoming significant merger to purchase stock before the announcement and sell it at a profit after the revelation. In that case, the corporation is responsible for returning the illicit earnings acquired by the insider.

Disgorgement is a complex legal remedy, and the court considers several considerations while deciding whether to impose it and how much to award. Hence, its remedy has certain features, as mentioned below:

• It makes the wrongdoers give up the profits or gains obtained through illegal profits.
• It remains an equitable remedy only enacted due to regulatory violations like securities fraud.
• The court never orders it singly but rather, along with other penalties imposed by the courts on the wrongdoers.
• It has not been considered criminal punishment.
• It can be calculated upon the wrongdoer's gains instead of losses incurred by the victim.
• It only acts as a deterrence to prevent wrongdoings.
• It ensures fair and just enforcement of the law.

Let us use the table below to compare the two:

The table below contrasts between the two:

This article has been a guide to Disgorgement and its meaning. Here, we compare it with restitution and forfeiture, and explain its remedy and examples. You may also find some useful articles here -

• Regulation M
• Misrepresentation
• Forfeited Shares