Disgorgement (sometimes referred to as “disgorgement of ill-gotten gains”) is a penalty leveled against individuals or businesses that have financially benefitted from illegal and/or unethical actions. Disgorgement is used — generally by the Securities and Exchange Commission (SEC) — to require the party engaged in this activity to repay the profits it wrongfully obtained, along with interest and financial penalties.
Often, the actions that precede a disgorgement order result in losses for other parties. For example, shareholders and other investors may have lost money because they acted based on false information provided by a company and its executives. Does that mean, however, that victims must suffer financial harm for the SEC to ask a court to order disgorgement?
The defendant’s argument
A case that reached the U.S. Supreme Court (SCOTUS) this year involved a man found guilty of engineering an illegal securities fraud scheme commonly referred to as a “pump-and-dump,” where he bought penny stocks, promoted them and then sold them at artificially inflated prices.
The defendant, who also was sentenced to prison for the offense, was ordered to repay over $4 million in disgorgement. He argued, however, that the SEC failed to show that he had financially harmed anyone. The SEC countered that victims did suffer financial harm but that even if they hadn’t, disgorgement was still a valid penalty. That was the question before the high court.
A rare unanimous decision
Last month, SCOTUS ruled unanimously that proving that victims suffered financial harm wasn’t necessary for the SEC to seek disgorgement for fraudulently obtained profits or “unjust gain.” In the court’s opinion, Justice Neil Gorsuch wrote that “a showing of pecuniary loss is not required before an investor may qualify as a victim of an offender’s wrongdoing entitled to compensation.”
It’s crucial to have an effective response to allegations of financial wrongdoing. The details of a case and the calculation of related losses can be extremely complex. It’s important to seek experienced legal guidance as early as possible in such scenarios as a result.