Disgorgement is the repayment of illegally obtained funds. Financial regulators such as the Securities and Exchange Commission (SEC) in the United States are responsible for determining the amount of funds acquired via illegal means for the purpose of issuing a court order mandating the repayment of the funds to the victims. In addition to coming up in a finance context, disgorgement can also come up in other legal cases where someone is convicted of engaging in illegal activities that resulted in profits.
Under the law, disgorgement is a remedy, not a punishment. It is intended to make good on the wrong by compensating people for their losses. People subjected to a disgorgement order must generally pay interest in addition to returning the funds, in a reflection of the fact that the people who were scammed or swindled lost out on opportunities to invest the funds legitimately and earn interest or other returns.
In addition to being required to disgorge the funds, the convicted party may also be required to pay a punitive fine like a civil money penalty (CMP). The amount of the fine varies depending on the case and the decisions made by a judge. The establishment of fines is designed to create clear consequences for people who make illegal profits, so that there is a strong incentive to avoid illegal activity. In large cases, a judge may opt to make an example of a company or individual by levying very heavy fines in addition to the disgorgement.
The process of determining the amount that the convicted party must repay is a complicated one. Companies and individuals who make illegal profits usually go to great lengths to conceal the amount of those profits and to cloak them in legitimacy. Investigators and regulators must first distinguish between legal and illegal profits, and then track down the full amount of the illegal profits. The funds are commonly disbursed into a trust managed by a person who is responsible for processing claims made by victims and making periodic payouts.
In some regions, tax law allows companies to claim disgorgement on their taxes, although they cannot claim punitive fines. It is advisable to receive the advice of a trained accountant to get information about how to report disgorgement and additional penalties on the books and how to handle them for tax purposes. Tax authorities will scrutinize tax claims carefully and it is important to confirm that information is stated clearly and accurately.
