SEC Disgorgement: How the Commission Claws Back Illegal Securities Profits

Following Liu v. SEC (2020), courts calculate disgorgement as net profits — gross revenues minus legitimate expenses directly related to generating those revenues. The SEC bears the burden of showing a reasonable approximation of profits; the burden then shifts to the defendant to show that any deductions are legitimate and causally connected to the violation. Courts reject deductions for general overhead, salaries of employees who participated in the fraud, or any expenses incurred in furtherance of the fraudulent scheme. Disgorgement is assessed against each individual who directly or indirectly received funds from the illegal activity — including relief defendants (family members who received proceeds).

In Ponzi schemes and outright fraud cases where the entire enterprise was illegal, courts have interpreted Liu v. SEC narrowly: because there are no legitimate expenses to deduct from an inherently fraudulent operation, disgorgement equals the full amount raised from victims minus amounts returned. Courts reason that Liu's 'net profits' limitation applies to legitimate businesses engaging in some illegal conduct — not schemes where the entire enterprise was a fraud. The NDAA's 10-year extended statute (enacted 2021) allows the SEC to disgorge profits from fraud schemes discovered years after they concluded, dramatically expanding exposure for defendants who thought they had outlasted the enforcement window.

Prejudgment interest is ordered in nearly every disgorgement case. The SEC calculates it using the IRS underpayment interest rate (currently 8% for 2025, based on federal short-term rate plus 3 percentage points), compounded quarterly from the date the illegal profits were received. In complex, multi-year schemes, prejudgment interest can add a substantial percentage to the total order. Defendants cannot avoid prejudgment interest by arguing they spent the money — courts treat it as part of the equitable remedy to prevent unjust enrichment of the time value of illegally held funds.

Under Sarbanes-Oxley Section 308, disgorged funds and civil penalties can be combined into a 'Fair Fund' and returned to harmed investors. The SEC appoints a distribution agent (often a bankruptcy trustee or financial professional) to administer the fund. Victims who suffered losses attributable to the defendant's fraud submit claims; the agent distributes pro rata based on verified losses. Fair Funds are most common in securities fraud and market manipulation cases involving widespread investor harm. When a defendant's disgorgement exceeds amounts needed for full investor compensation, the remaining balance is transferred to the U.S. Treasury.

Understand Your SEC/FINRA Penalty Exposure

Use ComplianceStack's free tools to identify gaps before regulators do.

What is the difference between disgorgement and a civil money penalty in SEC cases?

Disgorgement is an equitable remedy that strips defendants of profits they illegally gained — it is not punitive but restitutionary. Civil money penalties are punitive sanctions that go beyond what the defendant profited. In most SEC enforcement actions, defendants face both: disgorgement (return what you made) plus civil penalties (additional punishment for violating the law). After Liu v. SEC (2020), disgorgement must be tied to actual net profits and, where feasible, distributed to harmed investors. Civil penalties are capped by statute based on violation type — currently up to $1,070,233 per violation for serious Dodd-Frank violations (2024 adjusted amounts). A defendant who made $5M through fraud might disgorge $5M plus interest and pay an additional $5M civil penalty, for a total exposure of $10M+.

How does the 10-year statute of limitations work for SEC disgorgement cases?

The National Defense Authorization Act (NDAA) enacted in January 2021 extended the statute of limitations for disgorgement and penalties in fraud cases to 10 years. Previously, under Kokesh v. SEC (2017), the 5-year limitations period in 28 USC 2462 applied to disgorgement. The 10-year period applies to violations involving fraud, deceit, or manipulation. For non-fraud violations (e.g., failure to register), the 5-year period still applies. The 10-year extension significantly expanded the SEC's enforcement reach: schemes that concluded 6–9 years before investigation can now result in full disgorgement of all profits, plus nearly a decade of prejudgment interest. The clock starts from the date of the violation, not the date of discovery — so the SEC must file within 10 years of the underlying conduct.

Can SEC disgorgement orders be discharged in bankruptcy?

Generally no — SEC disgorgement orders related to fraud are non-dischargeable in bankruptcy under 11 USC 523(a)(19), which explicitly provides that debts arising from securities law violations involving fraud are not dischargeable. This provision was enacted in 2005 as part of BAPCPA. Courts have consistently applied this exception to SEC disgorgement orders where the underlying violation involved fraudulent conduct. For corporate defendants, Chapter 7 liquidation may mean disgorgement creditors (including SEC) compete with other creditors for available assets — but the obligation itself survives the bankruptcy estate's closure. Defendants who believe bankruptcy could eliminate disgorgement obligations are almost always advised otherwise by courts applying 11 USC 523(a)(19).