Disgorgement (law)
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Disgorgement is the act of giving up something on demand or by legal compulsion, for example giving up profits that were obtained illegally. In United States regulatory law, disgorgement is often a civil remedy imposed by some regulatory agencies to seize illegally obtained profits. When a private party sues for net profits, this is instead ordinarily known as
restitution Restitution and unjust enrichment is the field of law relating to gains-based recovery. In contrast with damages (the law of compensation), restitution is a claim or remedy requiring a defendant to give up benefits wrongfully obtained. Liability ...
for
unjust enrichment Restitution and unjust enrichment is the field of law relating to gains-based recovery. In contrast with damages (the law of compensation), restitution is a claim or remedy requiring a defendant to give up benefits wrongfully obtained. Liability ...
. Indeed, the U.S. Supreme Court has noted in '' Liu v. SEC'' (2020) that disgorgement is simply another term for restitution, and is subject to equitable limitations. Most notably, equity does not "penalize," so agencies cannot disgorge more than the net profits that resulted from the wrongdoing.


Overview

Disgorgement is a remedy used in US securities law. For example, disgorgement of short-swing profits is the remedy prescribed by § 16(b) of the
Securities Exchange Act of 1934 The Securities Exchange Act of 1934 (also called the Exchange Act, '34 Act, or 1934 Act) (, codified at et seq.) is a law governing the secondary trading of securities (stocks, bonds, and debentures) in the United States of America. A land ...
. The second edition of '' American Jurisprudence'' states that: Although not labelled "disgorgement," recovery of profits from the wrongful use of a patent or copyright belonging to another person or entity has a long history in US law. The
US Supreme Court The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all Federal tribunals in the United States, U.S. federal court cases, and over Stat ...
, in ''Sheldon v. Metro-Goldwyn Pictures Corp.'', 309 U.S. 390, 399-400 (1940), stated: In ''Kokesh v. SEC'', 137 S. Ct. 1635 (2017), the US Supreme Court unanimously disagreed with the view of the Security and Exchange Commission (SEC) that disgorgement in the case was remedial but held that disgorgement payments to the SEC in the case were penalties. The decision raised the questions of whether the SEC's power to order disgorgement derives only from statute, which would make congressional action necessary for the SEC to pursue disgorgement orders in federal court, and of whether the amounts awarded should be limited to actual profits gained."Chronicle of Disgorgement's Death Foretold: Kokesh v. SEC"
/ref> After ''Kokesh'', the SEC has argued in district courts throughout the US that outside ''Kokesh'' in the
statute of limitations A statute of limitations, known in civil law systems as a prescriptive period, is a law passed by a legislative body to set the maximum time after an event within which legal proceedings may be initiated. ("Time for commencing proceedings") In ...
context, disgorgement is not a penalty but an equitable remedy.Jones Day , "New Tax Bill Will Rewrite Rules for Deducting Disgorgement Payments to SEC"
/ref> Subsequently, in '' Liu v. SEC'' (591 U.S. ___ (2020)), the US Supreme Court affirmed that disgorgement awards could be issued as equitable remedies by the SEC but could not exceed the wrongdoer's net profits, as under , and that they should be funds returned to the defrauded investors. Disgorgement is a remedy for violations of the UA
Commodity Exchange Act Commodity Exchange Act (ch. 545, , enacted June 15, 1936) is a federal act enacted in 1936 by the U.S. Government, with some of its provisions amending the Grain Futures Act of 1922. The Act provides federal regulation of all commodities and fu ...
. 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."Marie K. Pesando, 73 ''American Jurisprudence'' (2d ed.) ''Stock and Commodity Exchanges'' § 22 (footnotes omitted). However, in such cases, the court may order disgorgement only up to "the amount with interest by which a defendant profited from his or her wrongdoing." Disgorgement payments to the SEC have for decades been considered completely equitable and compensatory and thus
deductible In an insurance policy, the deductible (in British English, the excess) is the amount paid Out-of-pocket expenses, out of pocket by the policy holder before an insurance provider will pay any expenses. In general usage, the term ''deductible'' m ...
under the
Internal Revenue Code The Internal Revenue Code of 1986 (IRC), is the domestic portion of federal statutory tax law in the United States. It is codified in statute as Title 26 of the United States Code. The IRC is organized topically into subtitles and sections, co ...
. EC Enforcement Manual § 3.1.2 (October 28, 2016)./ref> The December 2017 tax reform law provided that to be deductible, such payments must now 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 and the amount of the payment that constitutes
restitution Restitution and unjust enrichment is the field of law relating to gains-based recovery. In contrast with damages (the law of compensation), restitution is a claim or remedy requiring a defendant to give up benefits wrongfully obtained. Liability ...
or the amount paid to come into compliance with law. The new law adds Section 6050X, which requires the government to file an
IRS The Internal Revenue Service (IRS) is the revenue service for the Federal government of the United States, United States federal government, which is responsible for collecting Taxation in the United States, U.S. federal taxes and administerin ...
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, and it must set forth any amount that is restitution or remediation.">"Tax Reform Taxation Settlements"
/ref>


See also

* Bonus–malus *
Clawback The term clawback or claw back refers to any money or benefits that have been given out, but are required to be returned (clawed back) due to special circumstances or events, such as the money having been received as the result of a financial crim ...
* Fair Fund *
Surcharge (sanction) Prior to 2000 a local government officer or councillor in the United Kingdom, who had unlawfully spent public funds, or caused loss to a local authority through misconduct could be surcharged to recover public money. The surcharge was applied, aft ...


Notes


References

{{DEFAULTSORT:Disgorgement (Law) Judicial remedies Asset forfeiture sv:Förverkande