Disgorgement
Disgorgement is the legally mandated repayment of ill-gotten gains imposed on wrongdoers by the courts. In 2010 Lloyd Blankfein, CEO of Goldman Sachs, put on an aggressive facade to avoid a lawsuit brought forth by the SEC for his bank's role in selling a complex financial instrument tied to subprime mortgages to investors. Individuals or companies that violate Securities and Exchange Commission (SEC) regulations are typically required to pay both civil money penalties and disgorgement. The latter was coined in a 1974 New York Times op-ed about New York State's decision to buy two half-finished power plants from the struggling electric utility ConEd for $500 million, using taxpayer dollars to spread out the cost of the losing venture. In June 2017, a unanimous ruling by the U.S. Supreme Court in the case of Kokesh v. SEC clarified that disgorgement is a penalty that is subject to a five-year statute of limitations.
What Is Disgorgement?
Disgorgement is the legally mandated repayment of ill-gotten gains imposed on wrongdoers by the courts. Funds that were received through illegal or unethical business transactions are disgorged, or paid back, often with interest and/or penalties to those affected by the action.
Disgorgement is a remedial civil action, rather than punitive civil action. That means it seeks to make those harmed whole rather than to excessively punish wrong-doers.
Understanding Disgorgement
Individuals or companies that violate Securities and Exchange Commission (SEC) regulations are typically required to pay both civil money penalties and disgorgement. Proceeds from insider trading, embezzlement or illegal actions under the Foreign Corrupt Practices Act (FCPA) are subject to disgorgement. In June 2017, a unanimous ruling by the U.S. Supreme Court in the case of Kokesh v. SEC clarified that disgorgement is a penalty that is subject to a five-year statute of limitations.
However, disgorgement payments are not only demanded of those who violate securities regulations. Anyone profiting from illegal or unethical activities may be civilly required to disgorge their profits. In 2010 Lloyd Blankfein, CEO of Goldman Sachs, put on an aggressive facade to avoid a lawsuit brought forth by the SEC for his bank's role in selling a complex financial instrument tied to subprime mortgages to investors. It was alleged that Goldman Sachs withheld significant material disclosures about the nature of the financial instrument (known as Abacus 2007-AC1) that they pushed on their unsuspecting clients. Perhaps realizing that his bank would lose in the lawsuit, Blankfein decided to settle with the SEC, paying a record $550 million in disgorgement and penalties.
Privatizing Gains vs. Socializing Losses
In the aftermath of the financial crisis, many sought additional disgorgements from financial institutions intimately involved in creating the crisis and from the CEOs, directors, and other executives leading them. However, these individuals, in the end, were allowed to "privatize" their gains and "socialize" (i.e., dump on taxpayers) the losses of the institutions. With friends in high places, Blankfein, Jamie Dimon, John Thain, John Mack, Ken Lewis, Vikram Pandit and a rash of others were able to skate away with their multimillion-dollar bonuses.
The phrase privatizing profits and socializing losses has a number of synonyms, including "socialism for the rich, capitalism for the poor". Another likens it to lemon socialism. The latter was coined in a 1974 New York Times op-ed about New York State's decision to buy two half-finished power plants from the struggling electric utility ConEd for $500 million, using taxpayer dollars to spread out the cost of the losing venture.
Related terms:
Black Economy
The black economy is a segment of a country's economic activity that originates outside of the country's rules and regulations regarding commerce. read more
Civil Money Penalty (CMP)
A civil money penalty (CMP) is a punitive fine imposed by the Securities and Exchange Commission. Penalties and are not limited to securities-law violations. read more
Class Action
A class action is a legal course in which a plaintiff brings forward a lawsuit on behalf of a group of people who've suffered a similar loss. read more
Corner
To corner in an investing context is to gain control over a business, stock, or commodity to the point where it is possible to manipulate the price. read more
Financial Crisis
A financial crisis is a situation where the value of assets drop rapidly and is often triggered by a panic or a run on banks. read more
Foreign Corrupt Practices Act (FCPA)
The Foreign Corrupt Practices Act (FCPA) is a U.S. law that prohibits the payment of bribes to foreign officials to further business deals. read more
Fraud
Fraud, in a general sense, is purposeful deceit designed to provide the perpetrator with unlawful gain or to deny a right to a victim. read more
Privatizing Profits And Socializing Losses
Privatizing profits and socializing losses recognizes company earnings as shareholder property and losses as the responsibility of society. read more