As noted by the FCPA Blog earlier this week, disgorgement has quietly become a potent and heavily relied on aspect of the SEC’s FCPA enforcement strategy in recent years. So what is disgorgement exactly and how is it calculated?
Disgorgement is an equitable remedy authorized by the Securities Exchange Act of 1934 that is used to deprive wrong-doers of their ill-gotten gains and deter violations of federal securities law. The Act gives the SEC the authority to enter an order “requiring accounting and disgorgement,” including reasonable interest, as part of administrative or cease and desist proceedings (SEA of 1934).
As an equitable remedy, disgorgement is technically not intended as a tool to punish, but instead as a vehicle for preventing unjust enrichment. The SEC is therefore only permitted to recover the approximate amount earned from the alleged illicit activities (disgorging anything more would be considered punitive).
In calculating disgorgement, the SEC is required to distinguish between legally and illegally obtained profits. The first step in such calculations is to identify the causal link between the unlawful activity and the profit to be disgorged. Once this causal link is established, the SEC may assert its right to disgorge illicit profits that stem from this wrong-doing. Because calculations like these often prove difficult, courts tend to give the SEC considerable discretion in determining what constitutes an ill-gotten gain by requiring only a “reasonable approximation of the profits which are causally connected to the violation” (SEC v. Happ). Once the SEC satisfies this relatively low threshold, the burden shifts to the defendant, who must rebut the causal connection.
Rebutting an SEC calculation can prove difficult in practice where a violation leads seamlessly to the formation of a contract or a long-term business deal. For example, if a defendant who secured a series of lucrative contracts after an improper payment to a foreign official is unable to break the causal chain between the improper payment and the ongoing contracts it secured, it may be possible for the SEC to disgorge future, as yet unrealized, profits. Courts have recognized, however, that the disgorgement of such gains cannot be without limit and that, at some point, the continuum between a violation and profits becomes too attenuated to be feasible.
For more on disgorgement, see Disgorgement: The Devil You Don’t Know, which examines the SEC’s application of disgorgement in FCPA resolutions.
Marc Alain Bohn is an attorney with the law firm of Miller & Chevalier in Washington, D.C. He focuses on the Foreign Corrupt Practices Act, export controls and economic sanctions, and other international trade and policy issues. He can be reached here.