Disgorgement is a legal term that has gained significant attention in the world of finance and corporate misconduct. It refers to the act of surrendering ill-gotten gains or profits obtained through fraudulent or illegal activities. This article aims to provide a clear understanding of disgorgement, its purpose, and why individuals and businesses should care about it.

Defining Disgorgement

Disgorgement is a legal remedy imposed by courts or regulatory bodies that requires individuals or entities to give up profits or funds that were obtained unlawfully. The term is commonly used in cases involving securities fraud, antitrust violations, insider trading, and other financial misconduct. The objective of disgorgement is to strip wrongdoers of their illicit gains and deter future illegal behavior.

The Purpose of Disgorgement

Disgorgement serves several important purposes within the legal and regulatory framework:

  1. Compensation for victims: Disgorged funds are often distributed to victims or harmed parties, providing a measure of restitution and compensating them for their losses. By forcing wrongdoers to relinquish their ill-gotten profits, disgorgement seeks to restore fairness and offset the damages caused.
  2. Deterrence: Disgorgement acts as a strong deterrent against fraudulent or illegal activities. When individuals or businesses face the prospect of forfeiting their unlawfully obtained gains, it creates a powerful disincentive for engaging in such behavior in the first place. The threat of disgorgement helps maintain market integrity and fosters ethical conduct.
  3. Removal of unjust enrichment: Disgorgement aims to prevent wrongdoers from benefiting from their illegal actions. By requiring them to give up their ill-gotten profits, the remedy ensures that they do not profit from their misconduct and prevents unfair advantage over competitors who play by the rules.

Why You Should Care about Disgorgement

Disgorgement is a matter of great significance for individuals and businesses, regardless of their involvement in financial misconduct. Here’s why you should care:

  1. Protecting investors and consumers: Disgorgement helps safeguard the interests of investors and consumers by holding wrongdoers accountable for their actions. It acts as a deterrent against fraudulent practices that could harm your investments, retirement savings, or financial well-being. The remedy promotes transparency and fair practices within the financial markets, benefiting everyone involved.
  2. Preserving market integrity: Disgorgement plays a vital role in maintaining the integrity of markets and ensuring a level playing field. By penalizing those who engage in illegal activities, it fosters trust and confidence among market participants. This is particularly important for businesses operating in highly regulated industries, where compliance with laws and regulations is crucial for long-term success.
  3. Corporate responsibility and ethical behavior: Disgorgement reinforces the importance of corporate responsibility and ethical behavior. It sends a clear message that unlawful conduct will not be tolerated and that businesses must act in the best interests of their stakeholders. Paying attention to disgorgement cases can help individuals and businesses make informed decisions about their investments, partnerships, and business relationships.

Conclusion

Disgorgement is a powerful legal remedy aimed at rectifying financial misconduct, compensating victims, and deterring future illegal activities. By requiring wrongdoers to surrender their ill-gotten gains, it seeks to restore fairness, protect investors and consumers, and preserve market integrity. Individuals and businesses should care about disgorgement as it promotes ethical behavior, encourages corporate responsibility, and contributes to a more transparent and trustworthy financial system. Understanding disgorgement and its implications can empower individuals to make informed decisions and actively participate in promoting a culture of compliance and accountability.

Video Transcript

What Is Disgorgement?

Disgorgement is where a big claw or hand comes in, essentially, and grabs something and pulls it to a new person or entity. So I just visualized this big claw reaching and grabbing money and anything else that is authorized as part of a disgorgement.

So here is the scenario where it comes up. Let’s say you have a business owner who owns a business with her partner. Both of these two business owners are working together on the business. Things are going great, but then, one of the owners says, you know what, I am going to start a side business that competes with the business we own together. And for one of these big potential customers I have been talking to, instead of having that customer go into our shared business where I would only get half the profits, I am going to have that big customer go into my other business. That business that is competing with our shared business, because that way, she will get all of the profits from that big customer.

Well, you can’t do that. That is a breach of the fiduciary duty of loyalty. All business owners owe a duty of loyalty, a duty not to compete with each other and with their business. So if the business partner who was innocent decides to sue a court could rule not only does the bad business owner owe the money, but any profits that were generated in that other business owned by only the bad business owner will be disgorged and brought to the partnership. So that is an example of disgorgement in real life. It is when a court orders that another company and a company that might not even be a party to the case, in rare circumstances, must disgorge those profits and bring them back because they were illegally in that other entity or wrongfully in that other entity.

So what is disgorgement? It is simply when a court, or some other authority grabs assets, often funds, and moves it to another entity.

Another example of disgorgement is when a bankruptcy trustee finds money that was improperly transferred from a person who filed for bankruptcy to another person or entity. The bankruptcy trustee can reach out and disgorge those funds and bring it back into the bankruptcy estate to be used for the creditors of the estate.

I am Aaron Hall, an attorney for business owners and entrepreneurial companies. You can find more about me at aaronhall.com. You can get the free download we talked about earlier at aaronhall.com/free. And if you have questions to follow up from today, feel free to put them in the comment section below. I will either address them in a future live video session, or I will use your questions to create an entirely separate video to help you and other business owners, educating you to help make your company better and hopefully improve your success in life. It was a pleasure talking with you here today.