Glossary term
Disgorgement
Subject: Compliance and Regulation, Regulatory Supervision and Enforcement
Also known as: Surrender of profits, Giving up of gains
Disgorgement is a court or regulatory order requiring a wrongdoer to hand back profits or benefits obtained through illegal or improper conduct, so that they do not keep the gains.
Explanation
The idea is restoring the position, not punishing. Where a person made money through insider trading, bribery, mis-selling or a breach of rules, the authority calculates the gain and orders it to be paid over, usually with interest. The money may be returned to harmed investors or customers, or paid to the state. Disgorgement is often ordered alongside a penalty, which is the punishment, so the total cost of misconduct exceeds the profit. Calculating the gain can be contested: what counts as profit, how to treat costs, and whether causation is proven. Different jurisdictions limit the remedy in different ways. Without it, a fine smaller than the gain would leave rule-breaking profitable.
Example
A trader buys shares just before a takeover announcement, using a tip from a friend at the bidder, and makes a profit of 400,000. The regulator proves the link. A court orders him to give up the 400,000 plus interest and to pay a further penalty equal to the profit, so he ends up well behind where he started.
Not to be confused with
- Penalty
- A penalty punishes and deters. Disgorgement only takes back the gain, so it is not punishment in itself.