Securities and Exchange Commission v. Sethi Petroleum LLC, 4:15-cv-00338

Background

Sameer P. Sethi and Sethi Petroleum offered investments in the Sethi-North Dakota Drilling Fund-LVII (NDDF) beginning in 2014, promising oil-and-gas revenue and tax benefits.
The SEC sued (May 2015) alleging fraudulent misrepresentations in the NDDF offering under Section 17(a), Section 10(b), and Rule 10b-5; a preliminary injunction and asset freeze followed.
After the injunction, Sethi allegedly continued selling securities through a new entity, Cambrian, and was found in contempt for violating the injunction.
The Court granted summary judgment on the theory that Sethi misrepresented partnerships with major oil companies; other misrepresentation theories were denied at summary judgment.
The SEC moved for entry of judgment (disgorgement, prejudgment interest, civil penalty, and permanent injunction); Sethi moved to amend findings, arguing errors about who qualified as a “major” operator and reliance on counsel.
The Court denied Sethi’s motion to amend, found his conduct egregious and recurrent with scienter, ordered disgorgement (subject to offsets for returned funds), prejudgment interest, a $160,000 civil penalty, and a permanent injunction barring solicitation of investors.

Issues

Issue	Plaintiff's Argument (SEC)	Defendant's Argument (Sethi)	Held
Validity of summary-judgment finding that Sethi misrepresented partnerships with major oil companies	Statements were false and material; summary judgment appropriate on that theory	Statements were forward-looking; some operators (e.g., Slawson) were "major"	Court denied amendment; summary-judgment finding stands — Sethi failed to present evidence previously and representations reasonably conveyed partnerships with large companies
Reliance on counsel as negating scienter and as defense to injunction	Scienter shown; reliance on counsel irrelevant given evidence of deception and evasion	Sethi relied on counsel and legal advice, negating intent to defraud and reducing need for injunction	Court found reliance on counsel waived when raised late and not reasonably relied upon; evidence supports scienter
Permanent injunction (likelihood of future violations)	Sethi’s repeated violations, contempt, evasive steps, and scale of solicitation show reasonable likelihood of future violations	Sethi has engaged counsel and claims reform; continuation in oil/gas industry doesn't mean future securities solicitation	Court ordered permanent injunction barring solicitation of investors (except personal exchange-listed purchases) — factors (egregiousness, recurrence, scienter, lack of remorse, opportunity) favor injunction
Disgorgement, prejudgment interest, and civil penalty amounts	Disgorgement equal to total proceeds raised ($4,028,264.81); prejudgment interest using IRS underpayment rate; significant civil penalty	NDDF incurred legitimate expenses (~$3.4M) and funds were spent legitimately; Sethi lacks ability to pay large penalties	Court adopted disgorgement as a reasonable approximation of ill-gotten gains (subject to offset for returns to investors when Receiver completes distribution); awarded prejudgment interest from March 9, 2015; civil penalty set at $160,000 (single third-tier maximum)

Key Cases Cited

Fontenot v. Mesa Petroleum Co., 791 F.2d 1207 (5th Cir. 1986) (Rule 52(b) relief limited to correcting manifest error or newly discovered evidence)
Zale Corp. v. SEC, 650 F.2d 718 (5th Cir. 1981) (standards for injunctive relief and reasonable likelihood of future violations)
Gann v. SEC, 565 F.3d 932 (5th Cir. 2009) (factors for permanent injunction analysis)
Peterson, United States v. Peterson, 101 F.3d 375 (5th Cir. 1996) (instructions on evaluating good-faith reliance on counsel)
First City Financial Corp. v. SEC, 890 F.2d 1215 (D.C. Cir. 1989) (disgorgement must reasonably approximate profits causally connected to violation)
Allstate Insurance Co. v. Receivable Fin. Co., 501 F.3d 398 (5th Cir. 2007) (burden-shifting for disgorgement calculations)
Kokesh v. SEC, 137 S. Ct. 1635 (2017) (characterizing disgorgement as a penalty for statute-of-limitations context)
Morin v. Moore, 309 F.3d 316 (5th Cir. 2002) (issues raised for the first time in reply are generally waived)
Cavallini v. State Farm Mut. Auto. Ins. Co., 44 F.3d 256 (5th Cir. 1995) (same principle regarding new issues in reply briefs)