SEC Disgorgement Calculations: How Penalties Are Determined.

Calculating the amount of disgorgement and the amount of civil penalties the SEC will seek is very different in two important ways. These differences stem from the disparate purposes of disgorgement and civil penalties.

In Liu v. SEC (2020), the Supreme Court held that the SEC’s authority to seek disgorgement was limited. The Court noted that “the SEC’s authority to seek disgorgement, when seeking it as an equitable remedy under Section 21(d)(2)(A) . .. is limited to ‘net wrongful profits’ that the SEC must prove are ‘causally connected’ to the defendant’s conduct.”

While calculating civil penalties, the SEC may reference defendants’ gross pecuniary gain. With disgorgement, however, the calculations are measured in net gains.

Civil penalties are intended to punish defendants for violating the federal securities laws. Disgorgement, on the other hand, is an effort to remove profits that are attributable to the alleged wrongdoing.

When seeking statutory civil penalties, SEC enforcement attorneys generally view the amounts listed in the three-tiered statutory matrix as ceilings, not as mandatory minimums.

As Congress states in Section 21(d)(7) of the Exchange Act: “In any action or proceeding brought by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may order, disgorgement.”

Congress codified the SEC’s authority to seek disgorgement remedies through the 2021 National Defense Authorization Act (“NDAA”), which includes the statutory language cited above.

However, SEC courts had awarded disgorgement in the past prior to Congress expressly codifying the SEC’s authority to seek disgorgement through the NDAA.

In Kokesh v. SEC, 581 U.S. 455 (2017), the Supreme Court held that the SEC could not seek disgorgement after five years. However, Kokesh expressly reserved the separate question of whether courts possess authority to order disgorgement in SEC enforcement proceedings at all.

How does the SEC calculate net profits after Liu?

If legitimate business expenses are involved, then under Liu, they will ordinarily reduce the SEC’s disgorgement calculations. The SEC’s enforcement attorneys acknowledge that defendants should not pay out of pocket for legitimate business expenses incurred when engaging in conduct that the SEC claims violated the federal securities laws, such as their business offices’ rent, utilities, and telephone bills.

Defendants, however, will only be able to subtract legitimate business expenses. For example, courts will reject any expenses that merely served to further the defendants’ fraudulent scheme, such as any payments used to pay for the defendants’ “pay-to-play” payment schemes, and all of the defendants’ personal expenses.

Calculating the disgorgement amount is a three-part process. First, the SEC’s enforcement attorneys will reasonably approximate defendants’ wrongful profits. This approximation will be based upon the evidence they have uncovered to date. While this is a reasonable starting point, defendants can challenge the reasonableness of the SEC’s approximation, and they can challenge the SEC’s findings of fact by presenting their own evidence.

Second, the SEC’s enforcement attorneys will present their findings to the court. While the SEC’s enforcement attorneys may be able to present the court with circumstantial evidence supporting their findings, the burden of persuading a district court that the SEC’s disgorgement computations are wrong remains with the defendants.

Third, defendants’ lawyers must present evidence to the district court that the amount the SEC is seeking to disgorge is incorrect. Our lawyers can use the following strategies to attempt to prove that the SEC’s computations are wrong:

• Prove the SEC’s computation is wrong. Our lawyers can show that the SEC used the wrong calculations or figures in its computations.
• Seek to subtract legitimate business expenses. While the SEC’s enforcement attorneys acknowledge that legitimate business expenses should not be included in their computations, defendants’ lawyers must prove the business expenses are legitimate. For instance, even if defendants have evidence that supports their claimed expense deductions, the SEC may argue that the expenses are not legitimate business expenses, and they should not be used to reduce the amount of disgorgement.
• Substantiate claimed expenses. Even if the SEC allows deductions for business expenses, defendants must still prove the amount of these deductions. While defendants can dispute the amount of the deductions, it is still up to the defendants to prove the amount of the deduction and to present evidence supporting the claimed deductions.
• Documented refunds and chargebacks. If defendants need to account for investor payments that were either refunded or charged back, then defendants need to produce evidence of this. While the SEC may argue that it still has authority to seek restitution, defendants’ lawyers can use this evidence to argue that the amount of the gross pecuniary gain should be reduced.
• Income taxes. This is one of the few examples of an expense that cannot be subtracted from the SEC’s disgorgement computations. The federal courts have consistently upheld the SEC’s position that income taxes are not legitimate business expenses.

When can one defendant owe another person’s profits?

As a general rule, disgorgement cannot exceed the actual wrongful gain obtained by each wrongdoer. However, if concerted wrongdoers share the ill-gotten profits obtained through their joint efforts, then these wrongdoers can be held jointly and severally liable for the disgorgement.

Disgorgement measures the amount of wrongful profits obtained from a defendant’s violations. Restitution measures the amount of losses suffered by an investor. Therefore, when the loss exceeds the amount of the defendant’s gain, the defendant will generally not have to disgorge more than the amount of its gain.

In some cases, a criminal conviction and a sentencing court’s requirement of criminal restitution will offset a defendant’s obligation to disgorge. The issue here is that both the restitution and the disgorgement have the same purpose: to make victims whole. In this scenario, a defendant would likely only have to pay the amount that is not covered by the restitution.

However, the restitution payment will not offset any separate SEC civil penalties. While the restitution is intended to make victims whole, the civil penalty is intended to punish the defendant.

The SEC can also seek disgorgement from “relief defendants.” Relief defendants are people or entities that did not personally participate in any wrongdoing, but they received benefits from another person’s wrongdoing. With respect to relief defendants, the SEC is generally able to seek disgorgement if the relief defendant cannot show that the money was received through a bona fide transaction and cannot establish a legitimate ownership interest in the money.

How are SEC civil penalty amounts actually determined?

The amount that the SEC will seek as a civil penalty is generally the higher of two numbers. First, the amount of the civil penalty will depend on whether the SEC’s charges warrant a civil penalty that is in a Tier I, Tier II, or Tier III range.

• Tier I Civil Penalty, This is for “any violation of this title, except when a violation of this title involves a fraudulent, deceptive, manipulative, or contrivance and any violation of this title with a violation of a rule or regulation that meets the definition of “deliberate” or “reckless” conduct under Section 21(d)(3)(A)(i)(B).”
• Tier II Civil Penalty, This is for “any violation of this title which involves fraud, deceit, manipulation, or any violation of this title that involves a violation of a rule or regulation that meets the definition of “deliberate” or “reckless” conduct under Section 21(d)(3)(A)(i)(B).”
• Tier III Civil Penalty, This is for “any violation of this title which meets the criteria set forth in Section 21(d)(3)(A)(i)(B), and that results in substantial loss to the victim or investor or substantial pecuniary gain to the defendant.”

When seeking civil penalties in federal court, the SEC can seek the amount of the civil penalty that matches the corresponding statutory tier amount. These statutory amounts are adjusted annually for inflation and reflect the maximum amount that the SEC can seek as a civil penalty. For example, as of 2025, the amount for the Tier I maximum penalty is $11,823 for individuals and $118,225 for entities.

• Tier I: 2025 Maximums - Individual: $11,823, Organization: $118,225
• Tier II: 2025 Maximums - Individual: $59,114, Organization: $591,137
• Tier III: 2025 Maximums - Individual: $236,451, Organization: $1,182,251

The SEC generally seek multiple penalties in many cases based on the number of violations. However, simply targeting a certain number of investors does not automatically translate to a certain number of statutory violations.

When the SEC seeks a civil penalty, a second number is the defendant’s gross pecuniary gain. The penalty under Section 21(d)(3) can be “the gross amount of pecuniary gain” that the defendant obtained as a result of the violation. Here, the term “gross amount of pecuniary gain” is interpreted to mean the defendant’s gross gain, not net gain. The Gross pecuniary gain would be the money the defendant gained before subtracting legitimate business expenses.

As discussed above, because defendants’ attorneys can present evidence to reduce the amount of the civil penalty the SEC can seek in their disgorgement calculations, defendants’ attorneys will seek to reduce the amount of the civil penalty the SEC can seek in their penalty calculations. If a defendant had to pay restitution due to a criminal conviction, this does not automatically offset a defendant’s civil penalty.

When deciding how much to seek in disgorgement and civil penalties, the SEC’s enforcement attorneys will look at both factors: (i) their calculation and (ii) factors that a district court will take into account when granting the relief and determining the penalty.

Todd Spodek and the attorneys at Spodek Law Group handle federal cases of this kind from New York, Brooklyn, Queens and Los Angeles.

How is prejudgment interest added to SEC disgorgement?

Prejudgment interest is separate from the principal amount of disgorgement the SEC will seek. Prejudgment interest is an additional amount that is computed based on the amount of the disgorgement amount.

In administrative proceedings, the SEC calculates prejudgment interest under its Rule of Practice 600. Rule 600 provides that the prejudgment interest rate is equal to the federal tax underpayment rate. The federal tax underpayment rate is adjusted quarterly and compounds quarterly.

While the SEC’s administrative law judges do not have discretion when calculating the prejudgment interest they award in administrative proceedings, federal district courts have discretion to award prejudgment interest in SEC cases. When a federal district court decides to award prejudgment interest, it also has discretion to determine the appropriate interest rate to apply. In the vast majority of cases, federal district courts calculate prejudgment interest using the same methodology (the federal tax underpayment rate) as provided for in Rule of Practice 600.

In administrative proceedings, Rule of Practice 600 provides that prejudgment interest is calculated as follows: “Interest on the sum to be disgorged shall be computed at the underpayment rate of interest established under Section 6621(a)(2) of the Internal Revenue Code, compounded quarterly, and shall be due from the first day of the month following each such violation through the last day of the month preceding the month in which payment of disgorgement is made.”

For example, if the SEC charged a defendant with fraud and embezzlement in early 2024, and the defendant embezzled money throughout 2022, and the SEC’s investigation began in December 2023, then prejudgment interest would accrue from the first day of the month following each 2022 violation through the last day of the month preceding the month in which payment is made. While the SEC’s administrative law judges do not have discretion when calculating the prejudgment interest they award in administrative proceedings, federal district courts have discretion to award prejudgment interest in SEC cases. When a federal district court decides to award prejudgment interest, it also has discretion to determine the appropriate interest rate to apply.

How far back can the SEC seek monetary remedies?

Under Section 21(d)(8) of the Exchange Act, the SEC’s ability to seek disgorgement is subject to the following statutory limitations periods. In cases where the SEC does not allege fraud, deceit, manipulation, misrepresentation, or omission (i.e., cases involving non-scienter based charges), the statute of limitations for the SEC to seek disgorgement is five years. In cases where the SEC does allege fraud, deceit, manipulation, misrepresentation, or omission (i.e., cases involving scienter based charges), the statute of limitations for the SEC to seek disgorgement is ten years.

With regard to seeking disgorgement, the statute of limitations under Section 21(d)(8) specifically excludes any time that the defendants spent outside of the United States.

Prior to the enactment of the National Defense Authorization Act for Fiscal Year 2021, the SEC faced significant challenges when trying to enforce its authority to seek disgorgement in many cases. This was largely due to the language of Section 2462 of Title 28 of the United States Code, which provides: “Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.” In Kokesh v. SEC, 581 U.S. 455 (2017), the Supreme Court analyzed the SEC’s authority to seek disgorgement and noted that disgorgement is treated as a “penalty” under Section 2462. Therefore, when the SEC seeks civil penalties, it will generally be required to meet the five-year limitation period under Section 2462.

Along with this, Section 21(d)(8) also provides a ten-year limitation period for some specified “equitable remedies” under the federal securities laws. “Equitable remedies” include disgorgement and pre-judgment interest.

Will disgorgement and penalties be paid to investors?

Generally, in cases where harmed investors are involved, Liu requires that the disgorgement award be used to benefit them.

While civil penalties are not generally intended to benefit victims, Sarbanes-Oxley Section 308 permits civil penalties to be used in disgorgement and return of wrongfully gained profits to harmed investors.

The SEC can also establish “Fair Funds.” Fair Funds are used when the SEC seeks to use a combined disgorgement award and civil penalties to benefit investors. The proceeds for the Fair Fund are then distributed based on an approved plan that the district court approves or the Commission approves.

Once the SEC obtains approval to use the proceeds of a settlement or trial judgment in a Fair Fund, it must establish a distribution plan for the funds. This plan must establish:

• Eligible investors: Who is eligible to receive a distribution from the Fair Fund?
• Filing procedures: What evidence must be provided to substantiate a claim for a distribution?
• Disgorgement and restitution allocation formulas: How much of each eligible investor’s loss should be covered by the Fair Fund?

One key takeaway for investors in all three scenarios is that receiving a distribution may not reimburse all of the investor’s losses.

Additionally, the SEC is mandated to pay whistleblower awards in cases where the SEC collected monetary sanctions. Generally, whistleblower awards range from 10% to 30% of the monetary sanctions collected, but this only applies when a covered whistleblower action requires monetary sanctions exceeding $1 million in a securities-law enforcement action or in a civil action brought by the SEC under any statute. A covered whistleblower action also requires that the award be provided to an original source who provides a document or any other information that directly leads to the issuance of monetary sanctions in a securities-law enforcement action.

Speak With a Federal Defense Lawyer

If you are dealing with any part of what this article describes, the next step is a conversation with a lawyer who handles these cases. Spodek Law Group is a second generation criminal defense firm practicing since 1976, representing clients nationwide from offices in New York, Brooklyn, Queens and Los Angeles. Call 212-300-5196 to speak with our team.