Disgorgement is a court-ordered remedy that forces a person or company to give up the profits they earned through illegal conduct. It is not a fine and it is not compensation for a victim’s loss. The point is simpler: nobody should keep money they made by breaking the law. If an insider trades on confidential information and pockets $2 million, a court can order that entire $2 million returned, whether or not any individual investor can trace a matching loss.
The Legal Theory Behind the Remedy
The doctrine rests on preventing unjust enrichment. When someone profits at others’ expense through fraud, market manipulation, or breach of trust, the law treats those profits as belonging to the victims or the public rather than the wrongdoer. Courts classify disgorgement as an equitable remedy, which means it draws on principles of fairness rather than rigid common-law rules and gives judges some discretion in shaping the award.
The goal is deterrence by removing the financial upside of misconduct, not punishment. Punishment is what civil penalties are for. That distinction sounds academic, but it drives real consequences: how courts calculate the amount, how long the government has to bring a claim, and whether the defendant can deduct the payment on a tax return.
Disgorgement Versus Penalties and Restitution
Enforcement actions routinely bundle three monetary remedies, and they are easy to confuse. Each measures a different thing.
- Disgorgement measures the defendant’s gain. The question is how much profit the wrongdoer made from the illegal activity.
- Civil penalties punish the wrongdoer and deter future misconduct. In SEC cases, penalty amounts fall into tiers depending on whether fraud was involved and whether the conduct caused substantial losses to others.1Office of the Law Revision Counsel. 15 USC 78u – Investigations and Actions
- Restitution measures the victim’s loss. The question is how much damage the injured party suffered and what amount restores them to their pre-harm financial position.
Picture a single insider trading case. A trader earns $500,000 by selling stock based on confidential information. A court might order $500,000 in disgorgement to strip the profit, impose a separate $500,000 civil penalty as punishment, and require $100,000 in restitution to a counterparty who sold shares at a depressed price. Three different remedies, three different purposes. Imposing one does not preclude the others.
The dollar figures rarely line up. A scheme might generate $10 million in profits for the wrongdoer while causing $50 million in investor losses, or vice versa. Disgorgement captures only the defendant’s side of that equation.
How Courts Calculate the Amount
Calculating disgorgement is rarely as simple as pointing to a bank balance. The analysis starts with gross revenue, works down to net profits, and then adds interest for the time the defendant held the money.
Gross Profits as the Starting Point
The enforcing agency first identifies the total revenue the defendant generated from the wrongful conduct. In an insider trading case, that is the total gain from the trades, or the losses avoided by selling before bad news hit. In a fraud case, it might be the total fees collected from deceived investors. This gross figure is the baseline.
Deducting Legitimate Expenses
The Supreme Court settled in 2020 that disgorgement awards in SEC actions must be limited to a defendant’s net profits. In Liu v. Securities and Exchange Commission, the Court held that courts must deduct legitimate expenses before entering a disgorgement order.2Justia Law. Liu v Securities and Exchange Commission, 591 US (2020) An expense qualifies as legitimate if it has value independent of fueling the fraudulent scheme. In post-Liu cases, brokerage commissions, wire transfer fees, and administrative costs like accounting and legal expenses have been treated as deductible.
Not everything the defendant spent money on qualifies. Costs incurred specifically to perpetrate the fraud can be denied. The Court recognized a potential exception for “wholly fraudulent” schemes where the entire business existed only to commit fraud; in those situations, courts have broader discretion to deny deductions.
The defendant bears the burden of proving each claimed deduction. The agency establishes the gross revenue tied to the misconduct, and then it falls to the defendant to document which expenses were legitimate. Vague claims or incomplete records will not do. When a defendant fails to prove deductions, the court uses the higher gross figure.
Prejudgment Interest
A defendant who holds ill-gotten money for years earns returns on it. Prejudgment interest strips that windfall by adding the time value of money to the disgorgement total. In SEC administrative proceedings, the interest rate is set at the IRS underpayment rate under Internal Revenue Code Section 6621(a)(2), compounded quarterly.3eCFR. 17 CFR 201.600 – Interest on Sums Disgorged That rate equals the federal short-term rate plus three percentage points.4Office of the Law Revision Counsel. 26 USC 6621 – Determination of Rate of Interest For the first quarter of 2026, the underpayment rate sits at 7%.5Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
Interest accrues from the date the defendant first received the illegal profits until the court enters judgment. In cases where the misconduct occurred years before enforcement caught up, this component alone can be substantial.
How Long the Government Has to Act
Before 2017, the SEC treated disgorgement as immune from any statute of limitations. The Supreme Court shut that down in Kokesh v. Securities and Exchange Commission, holding that disgorgement qualifies as a penalty subject to the five-year limitations period in federal law.6Supreme Court of the United States. Kokesh v Securities and Exchange Commission, 581 US (2017) The governing statute requires any action to enforce a civil fine, penalty, or forfeiture to be brought within five years of when the claim first accrued.7Office of the Law Revision Counsel. 28 USC 2462 – Time for Commencing Proceedings
Congress partially rolled that back in the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, which codified the SEC’s disgorgement authority and carved out a longer deadline for the worst offenses. Under the amended Exchange Act, the limitations period extends to ten years for violations that require proof of scienter, meaning intentional or knowing misconduct.1Office of the Law Revision Counsel. 15 USC 78u – Investigations and Actions Fraud and insider trading cases typically fall into the ten-year category. Negligence-based violations remain on the five-year clock.
For disgorgement sought outside of SEC enforcement, such as in breach-of-fiduciary-duty cases or trademark disputes, time limits depend on the applicable statute or equitable doctrine. No single federal rule controls those scenarios.
Where Disgorgement Comes Up
SEC Enforcement
The SEC is the most visible user of the remedy. Federal law explicitly authorizes the agency to seek disgorgement of “any unjust enrichment” resulting from securities law violations in federal court.1Office of the Law Revision Counsel. 15 USC 78u – Investigations and Actions The agency routinely deploys it in insider trading, accounting fraud, Ponzi schemes, and market manipulation. In insider trading cases, the SEC seeks to disgorge both profits earned and losses avoided by selling before nonpublic negative information became public.8U.S. Securities and Exchange Commission. Disgorgements Audit 311
Disgorgement also features heavily in Foreign Corrupt Practices Act enforcement. The SEC calculates the amount based on the profits a company earned from improperly obtained contracts, not just the size of the bribe.
CFTC Enforcement
The Commodity Futures Trading Commission has parallel authority. Federal law authorizes courts to order disgorgement of “gains received in connection with” the violation in any action brought by the CFTC.9Office of the Law Revision Counsel. 7 USC 13a-1 – Enjoining or Restraining Violations The CFTC uses it against manipulative trading in futures, derivatives, and cryptocurrency markets.
Trademark and Intellectual Property
Disgorgement of an infringer’s profits is a standard remedy in trademark cases under the Lanham Act. The statute provides a procedural shortcut: the plaintiff only has to prove the defendant’s sales revenue from the infringing products, and the defendant then bears the burden of proving every cost it wants to subtract. If the resulting profit figure strikes the court as inadequate or excessive, the judge can adjust it up or down.10Office of the Law Revision Counsel. 15 USC 1117 – Recovery for Violation of Rights The statute specifies that the award is compensation, not a penalty.
Patent and copyright infringement cases use analogous profit-disgorgement theories, with different statutory details. The core idea is consistent: money made from using someone else’s protected work without permission goes back.
Breach of Fiduciary Duty
When a corporate officer, trustee, or other fiduciary secretly profits from their position of trust, courts order disgorgement of those profits to the injured beneficiary or entity. This application predates securities regulation by centuries and draws directly on equity court traditions. A trustee who diverts trust assets into a personal investment account must surrender not just the diverted assets but any profits those assets generated.
Where the Money Goes
Fair Funds for Investors
In SEC enforcement, the primary distribution vehicle is the Fair Funds provision created by the Sarbanes-Oxley Act. It allows civil penalties collected in the same action to be combined with disgorged amounts into a single fund for victim distribution.11Office of the Law Revision Counsel. 15 USC 7246 – Fair Funds for Investors Pooling the two increases the total available for harmed investors, which matters because disgorgement alone often falls short of covering losses.
The SEC typically appoints a fund administrator or claims agent to manage the distribution. Victims submit formal claims documenting that their losses were caused by the defendant’s conduct. If total proven losses exceed collected funds, the administrator prorates the distribution. The claims process can take months or years, especially in large fraud cases with thousands of victims.
Payments to the Treasury
The Liu decision expressed skepticism about the SEC’s longstanding practice of sending disgorged funds to the U.S. Treasury rather than to harmed investors, but it stopped short of banning the practice. Congress addressed the gap in the 2021 NDAA amendments, which codified disgorgement as a statutory remedy distinct from the equitable framework in Liu. Under the amended statute, the SEC can seek disgorgement even when distributing funds to individual victims is impractical, and courts have upheld orders directing payment to the Treasury in those situations.1Office of the Law Revision Counsel. 15 USC 78u – Investigations and Actions Funds that cannot feasibly be returned, whether because victims are unidentifiable or because distribution costs would consume the fund, end up with the Treasury.
In CFTC actions and private civil litigation, courts may appoint a receiver to collect and distribute funds under a court-approved plan.
Tax Treatment of Disgorgement Payments
Whether a disgorgement payment is tax-deductible catches many defendants off guard. The general rule is that any amount paid to a government entity in connection with a legal violation is not deductible.12Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses That covers fines, penalties, and disgorgement paid to the SEC, CFTC, or other government bodies.
There is an exception. Amounts that constitute restitution for damage caused by the violation, or amounts paid to come into compliance with a law, may still be deductible. To qualify, the payment must be identified as restitution or a compliance payment in the court order or settlement agreement, and the taxpayer must establish that the amount genuinely serves a restorative purpose.12Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses Labeling a payment “restitution” in the agreement is not enough on its own.
Deductibility in practice depends heavily on how the settlement or court order is drafted. A payment limited to the defendant’s net profits and directed to individual victims looks more like deductible restitution. A payment that exceeds net profits or flows into the government’s general accounts looks more like a nondeductible penalty. Defense counsel negotiate the language of settlement agreements with these tax consequences in mind, because the answer can swing the effective cost of the resolution by 20% or more depending on the defendant’s tax bracket.