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Legal Memorandum: Disgorgement of Illegally Gained Profits

Issue: In addition or alternatively to punitive damages, can a company face forfeiture or disgorgement of its illegally gained profits?

Area of Law: Corporate & Securities, Litigation & Procedure
Keywords: Disgorgement or forfeiture of profits; Equitable powers; Illegally gained profits
Jurisdiction: Federal
Cited Cases: 151 F.3d 42; 797 F.2d 70; 375 F. Supp. 2d 442; 625 F.2d 738; 492 U.S. 33
Cited Statutes: None
Date: 03/01/2006

  In exercising its equitable powers, a court may order a wrongdoer to disgorge its illegally or fraudulently obtained profits.  SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997).  Primarily a remedy for violation of the federal securities law, the purpose of disgorgement is to deter further violations by depriving the wrongdoer of its ill-gotten gains.  Id. at 175.  Disgorged funds may, in the trial court’s discretion, may be distributed to the victim of the wrongdoing to compensate her for her loss.  Id. 

An action for disgorgement of funds is equitable in nature.  “‘[A]ctions to disgorge improperly gained profits, to return funds rightfully belonging to another, or to submit specific funds wrongfully withheld, are all equitable actions—even though the relief they seek is monetary—because they are restitutionary in nature.'”  Jones v. Ford Motor Corp., No. 00Civ.8330RJHKNF (S.D.N.Y. Mar. 31, 2005) (quoting Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989)).

The court’s order that a defendant disgorge profits need only be based on a reasonable approximation of the profits connected to the violation.  SEC v. Warde, 151 F.3d 42, 50 (2d Cir. 1998).  The risk of uncertainty in the court’s calculation of the profits illegally gained properly falls on the wrongdoer.  Id. at 50.

Disgorgement is an appropriate remedy for a securities violation, Warde, 151 F.3d 42, and disgorgement or forfeiture of profits is also appropriate outside of the securities law context, see, e.g., Phansalkar […]

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