Summary of SEC v. Govil

Chris T

November 3, 2023

Securities Law

Background of the Case

In the case of Securities & Exchange Commission v. Govil, the United States Court of Appeals for the Second Circuit made a significant decision impacting the Securities and Exchange Commission (SEC)’s enforcement abilities. This case revolved around allegations by the SEC that the defendant, associated with the company Cemtrex, misled investors and misused their funds for personal expenses.

Key Allegations and Settlements

• The defendant was accused of causing Cemtrex to issue securities under false pretenses, misleading investors into contributing $7.3 million for supposed business expenses.
• He reached a settlement where he surrendered his securities in Cemtrex, valued at approximately $5.6 million, and paid an additional $1.5 million through a secured promissory note.
• Additionally, he entered into a Consent Agreement with the SEC, accepting judgment on all counts of securities fraud but leaving the issue of disgorgement unresolved.

Disgorgement Dispute

• The SEC moved for disgorgement of about $5.8 million, but the defendant appealed, citing the Supreme Court’s decision in Liu v. SEC, which mandated that disgorgement must be awarded to actual victims.
• The Second Circuit supported the defendant’s position, emphasizing the need for pecuniary harm to be demonstrated for disgorgement to be applicable.

Legal Interpretation and Implications

• The case involved interpreting 15 U.S.C. § 78u(d)(5) and § 78u(d)(7), which give the SEC authority to seek disgorgement.
• The Liu decision and subsequent legislative changes, like the William M. (Mac) Thornberry National Defense Authorization Act (NDAA), have influenced how disgorgement is understood and applied.
• There’s a noted difference in interpretation between the Second and Fifth Circuits, with the former emphasizing disgorgement as an equitable remedy requiring proof of pecuniary harm to investors.

The Second Circuit’s Stance

• The Court clarified that disgorgement under § 78u(d)(5) and § 78u(d)(7) must be considered equitable relief, requiring the demonstration of pecuniary harm to investors.
• The Second Circuit instructed the district court to reassess whether investors suffered pecuniary harm and, if so, to offset the value of the surrendered securities against the disgorgement amount.

Broader Implications

• This decision highlights the ongoing debate about the SEC’s ability to pursue profits from allegedly unlawful activities.
• The case may contribute to a deepening split among federal circuits, potentially leading to Supreme Court intervention if Congress does not clarify the law.

In summary, the Second Circuit’s ruling in Govil represents a significant moment in securities law, reinforcing the necessity of demonstrating investor harm in disgorgement cases and potentially shaping future SEC enforcement strategies.