By Jody Godoy
(Reuters) – The U.S. Securities and Exchange Commission asked a federal appeals court on Friday to reconsider a ruling that it said prevents the agency from clawing back ill-gotten gains in cases in which laws were violated but no victims were harmed.
The SEC filed a petition asking the full 2nd U.S. Circuit Court of Appeals in New York to review the October ruling made by a three-judge panel in a case involving Aron Govil, former CEO of Cemtrex Inc. If left intact, the ruling risks letting players in the securities industry profit from illegal activity, the agency said.
The question applies to a broad range of cases, including allegations that cryptocurrency industry participants were required to register as securities businesses.
The SEC has the ability to recoup ill-gotten gains in its cases, a mechanism known as disgorgement. The U.S. Supreme Court set limitations in 2020, saying disgorgement cannot exceed the net profits of the conduct at issue. The court also said that disgorgement generally must be “awarded for victims.”
The agency argued in its petition on Friday that the 2nd Circuit misapplied that decision in the case alleging that Govil misappropriated investor funds.
Govil was ordered to pay $5.8 million in disgorgement last year. After he appealed, the 2nd Circuit said the SEC had failed to show investors were harmed.
The SEC argued on Friday that disgorgement is about “restoring the status quo by depriving a wrongdoer of his ill-gotten gains, not redressing pecuniary harms of victims.”
Matthew Ford, an attorney for Govil, said the 2nd Circuit followed the Supreme Court’s ruling.
“If the SEC wants to seek a return of money to investors it claims lost money, it must show the investors actually lost money in the first place,” he said.
A spokesperson for the SEC did not immediately reply to requests for comment.
(Reporting by Jody Godoy; Editing by Leslie Adler)
