86 F.4th 89
2d Cir.2023Background
- Aron Govil, controlling shareholder of Cemtrex, diverted roughly $7.3 million from three 2016–2017 securities offerings into personal accounts.
- Govil entered a company Settlement: he surrendered Series A, Series C, and Series 1 preferred shares (collectively valued at ~$5.566M) and issued a secured promissory note for ~$1.533M; Cemtrex released private claims and canceled the surrendered shares.
- Govil also executed a Consent Agreement with the SEC consenting to liability but leaving disgorgement, prejudgment interest, and penalties for the court or later motion.
- The SEC moved for disgorgement (~$7.3M); the district court credited the promissory note but refused to offset the value of surrendered securities, ordering about $5.8M in disgorgement.
- The Second Circuit vacated and remanded: (1) held disgorgement under 15 U.S.C. §78u(d)(5) and §78u(d)(7) is subject to Liu’s equitable limits (per Ahmed) and requires a finding that investors suffered pecuniary harm; (2) held surrendered securities, if disgorgement is authorized, must be valued and credited against any disgorgement award.
Issues
| Issue | Plaintiff's Argument (SEC) | Defendant's Argument (Govil) | Held |
|---|---|---|---|
| Whether disgorgement under §78u(d)(5) and §78u(d)(7) is authorized here without a finding that investors suffered pecuniary harm | Disgorgement is authorized; measured by defendant's wrongful gains; need not quantify investor losses and SEC will distribute proceeds to harmed investors if feasible | Liu/Ahmed require equitable limits; investors are not "victims" for equitable disgorgement unless they suffered pecuniary harm; district court made no such finding | Vacated and remanded: under Liu (and Ahmed), disgorgement must be "for victims," which requires a predicate finding of pecuniary harm; district court abused its discretion by not making that finding |
| Whether the value of securities Govil surrendered to Cemtrex offsets disgorgement | Surrendered stock allegedly did not provide value to victims (e.g., control passed to Govil's son; promissory note provided cash) and thus should not reduce disgorgement | Surrender of securities returned value to the wronged party and constitutes payment satisfying disgorgement; defendant should get credit dollar-for-dollar | Held that returned property can satisfy disgorgement; district court erred to disregard surrendered securities; on remand the court must value the surrendered securities and credit that amount against any disgorgement award |
Key Cases Cited
- Liu v. SEC, 140 S. Ct. 1936 (2020) (disgorgement is equitable relief only when it does not exceed net profits and is awarded for victims)
- SEC v. Ahmed, 72 F.4th 379 (2d Cir. 2023) (§78u(d)(7) disgorgement must comport with Liu’s equitable limitations)
- Kokesh v. SEC, 581 U.S. 455 (2017) (disgorgement characterized as a penalty for statute-of-limitations purposes; left open question whether courts may order disgorgement)
- SEC v. Palmisano, 135 F.3d 860 (2d Cir. 1998) (a defendant should not be required to return ill-gotten proceeds more than once; payments in other proceedings may be credited against disgorgement)
- SEC v. Contorinis, 743 F.3d 296 (2d Cir. 2014) (disgorgement’s purpose is to deprive violators of unjust enrichment)
- Ciminelli v. United States, 143 S. Ct. 1121 (2023) (federal fraud statutes protect property rights; deception without pecuniary harm may not satisfy fraud requirements)
- FTC v. Bronson Partners, 654 F.3d 359 (2d Cir. 2011) (disgorgement is a remedy to strip unlawful profits; returned funds are not unjust gains)