The disgorgement remedy is a court order that forces someone who profited from illegal conduct to give those profits up. Federal regulators, led by the Securities and Exchange Commission, use it to strip away gains from insider trading, fraud, market manipulation, and similar violations so the wrongdoer walks away no better off than before the misconduct. The money either goes back to harmed investors or, when victims cannot be found, into the U.S. Treasury.
Where the SEC Gets Its Authority
Two provisions of the Securities Exchange Act of 1934 anchor the SEC’s power to seek disgorgement. Under 15 U.S.C. § 78u(d)(5), federal courts can grant “any equitable relief that may be appropriate or necessary for the benefit of investors.”1Office of the Law Revision Counsel. 15 USC 78u – Investigations and Actions Section 78u(d)(7), added in 2021, explicitly authorizes the SEC to seek disgorgement of unjust enrichment in any enforcement action.2Office of the Law Revision Counsel. 15 USC 78u – Investigations and Actions
To obtain an order, the government must show a clear link between the specific violation and the money the defendant gained from it. Unrelated earnings and legitimate wealth are off limits. Legal teams on both sides routinely spend months tracing transaction histories to establish those connections.
One boundary worth knowing: the Federal Trade Commission does not have the same tool. In AMG Capital Management v. FTC (2021), the Supreme Court held that Section 13(b) of the FTC Act authorizes only injunctions, not disgorgement or restitution.3Supreme Court of the United States. AMG Capital Management LLC v Federal Trade Commission If you are facing an FTC action rather than an SEC action, the monetary exposure runs on different tracks.
How the Amount Is Calculated
The ceiling comes from Liu v. SEC (2020): disgorgement cannot exceed the wrongdoer’s net profits.4Justia. Liu v Securities and Exchange Commission Courts must subtract legitimate business expenses from the gross revenue the illegal activity generated before setting the figure. The Court specifically pointed to outlays like lease payments and equipment costs, which can have value independent of the fraud, as the type of expense that generally qualifies for deduction.
Money already returned to investors through private settlements or partial refunds also comes out of the calculation. If a defendant raised $1 million through a fraudulent scheme, returned $300,000 to investors, and spent $150,000 on legitimate operational costs, the court would cap disgorgement at roughly $550,000. Only profits tied to the violation period count, so timelines matter: lawful income earned before or after the misconduct stays with the defendant.
When Multiple People Are Involved
The SEC has historically asked courts to hold each participant in a scheme responsible for the entire pool of profits. Liu pushed back. Making one defendant pay for profits that flowed to someone else, the Court said, “runs against the rule in favor of holding defendants individually liable.”4Justia. Liu v Securities and Exchange Commission A narrow exception survives for genuine partners in wrongdoing who shared in the proceeds, but courts now look harder at who actually received what before imposing collective liability.
Financial Records the Defendant Has to Produce
Getting the number right takes paperwork. Defendants typically need bank statements, tax returns, internal accounting ledgers, and brokerage records showing the timing and volume of every relevant transaction. These are assembled into a formal accounting that gives the court a complete picture of inflows and outflows during the violation period.
Receipts and payroll records are what justify deductions. Without proper documentation, courts tend to rely on the government’s estimates, which almost always favor higher amounts. A defendant who can show clean records proving $200,000 went toward genuine operating costs will face a meaningfully smaller order than one who shows up with incomplete paperwork and vague descriptions of expenses.
Defendants who claim they cannot afford to pay face a separate documentation burden. Under SEC rules, they may be required to file a sworn financial disclosure statement detailing all assets, liabilities, income, and expenses from the date of the first alleged violation through the date of the order.5eCFR. 17 CFR 201.630 – Inability to Pay Disgorgement, Interest or Penalties Failing to file after asserting inability to pay can result in the claim being deemed waived entirely.
Interest Added to the Base Amount
A disgorgement order does not just cover the original profits. The SEC adds prejudgment interest starting from the first day of the month after each violation through the last day of the month before payment is made.6eCFR. 17 CFR 201.600 – Interest on Sums Disgorged The rate used is the IRS underpayment rate (the federal short-term rate plus three percentage points, compounded quarterly). For early 2026, that rate sits at 7% for the first quarter and 6% for the second.7Internal Revenue Service. Quarterly Interest Rates
On a large amount, years of compounding can add hundreds of thousands of dollars. Defendants who place funds in escrow or provide other payment guarantees during the litigation may petition for a reduced rate, but the Commission or hearing officer must approve any such arrangement before the order is entered.6eCFR. 17 CFR 201.600 – Interest on Sums Disgorged
How Long the SEC Has to Act
In Kokesh v. SEC (2017), the Supreme Court held that disgorgement qualifies as a “penalty” under the general federal limitations statute, 28 U.S.C. § 2462, which imposes a five-year deadline on enforcement actions seeking civil fines or penalties.8Supreme Court of the United States. Kokesh v Securities and Exchange Commission9Office of the Law Revision Counsel. 28 USC 2462 – Time for Commencing Proceedings
Congress responded in 2021 by extending the window for the most serious cases. The SEC now has up to 10 years to seek disgorgement when the underlying conduct required proof of intent to defraud. That covers violations of the Exchange Act’s anti-fraud provision (Section 10(b)), the Securities Act’s fraud provision (Section 17(a)(1)), and the Investment Advisers Act’s fraud prohibition, among other scienter-based offenses.2Office of the Law Revision Counsel. 15 USC 78u – Investigations and Actions Any time the defendant spends outside the United States does not count toward either period.
Disgorgement Compared to Civil Penalties
Disgorgement and civil money penalties are separate tools, and the SEC frequently seeks both in the same action. Disgorgement is measured by the defendant’s gain. Civil penalties are set by statutory tiers based on how serious the violation was.
Under 15 U.S.C. § 78u(d)(3), civil penalties against individuals fall into three tiers:1Office of the Law Revision Counsel. 15 USC 78u – Investigations and Actions
- First tier: up to $5,000 per violation for a natural person (or $50,000 for an entity), or the gross pecuniary gain from the violation, whichever is greater.
- Second tier: up to $50,000 per violation for a natural person (or $250,000 for an entity) when the violation involved fraud or reckless disregard of a regulatory requirement.
- Third tier: up to $100,000 per violation for a natural person (or $500,000 for an entity) when the fraud directly caused substantial losses or created a significant risk of substantial losses to others.
A defendant who made $2 million through insider trading could face a disgorgement order of $2 million (minus legitimate expenses) with civil penalties stacked on top. The penalties serve a punitive and deterrent purpose; disgorgement strips the profit. Congress has consistently treated them as complementary, authorizing penalties “in addition to” disgorgement.
Paying the Order and Where the Money Goes
In SEC administrative proceedings, defendants must pay within 21 days after service of the order unless the order specifies a different deadline.10eCFR. 17 CFR Part 201 Subpart D – Rules Regarding Disgorgement and Penalty Payments Federal court orders set their own timelines. Payment can be made by wire transfer, certified check, bank cashier’s check, or money order, accompanied by a letter identifying the case name, case number, and the respondent making payment.
Under 15 U.S.C. § 7246, which originated as Section 308 of the Sarbanes-Oxley Act, disgorged funds and civil penalties can be combined into a “Fair Fund” for the benefit of victims.11Office of the Law Revision Counsel. 15 USC 7246 – Fair Funds for Investors A court-appointed administrator identifies eligible victims and distributes the money under a court-approved allocation plan. The process can take months or years depending on the number of investors and the complexity of the scheme.
When victims cannot be identified or located, or after eligible claims have been processed, remaining funds are transferred to the U.S. Treasury.1Office of the Law Revision Counsel. 15 USC 78u – Investigations and Actions Administrative fees covering the receiver and any third-party auditing services come out of the fund before the final distribution or transfer. Defendants must provide proof of payment; failure to comply can trigger contempt proceedings and additional sanctions.
Tax Treatment of a Disgorgement Payment
Disgorgement payments are generally not tax-deductible. Under 26 U.S.C. § 162(f), no deduction is allowed for amounts paid to a government entity in connection with a legal violation or investigation.12Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses A narrow exception exists if the payment qualifies as “restitution” for harm caused by the violation and is explicitly identified as restitution in the court order or settlement agreement.
The IRS takes a strict view of what counts. If the court order gives the government discretion over how to use the funds rather than mandating direct victim compensation, the payment does not qualify as deductible restitution.13Internal Revenue Service. Chief Counsel Advice 202439015 Money routed to a Fair Fund might seem compensatory, but if the order also allows leftover funds to flow to the Treasury, the IRS has treated the entire amount as a non-deductible penalty. A defendant who disgorges $1 million loses $1 million of after-tax income, not $1 million of pre-tax income. The label “restitution” alone is not enough if the underlying terms give the government discretionary control over the funds, so settlement language deserves close attention before signing.