SEC v. Govil: Disgorgement, Pecuniary Harm, and Circuit Split

In SEC v. Govil, the Second Circuit ruled that the Securities and Exchange Commission cannot obtain disgorgement unless it proves investors suffered actual financial loss, a holding that split from other federal appeals courts and now sits before the Supreme Court in a related case, Sripetch v. SEC, set for oral argument on April 20, 2026. The decision reshaped SEC disgorgement law in New York, Connecticut, and Vermont, and the Supreme Court’s ruling will determine whether the same limit applies nationwide.¹²

What the Second Circuit Held

The court vacated a multimillion-dollar disgorgement order against Aron Govil, the founder of Cemtrex, Inc., who the SEC alleged had diverted more than $7.3 million in investor proceeds from three securities offerings into his own accounts. The Second Circuit’s holding was narrow but consequential: a defrauded investor is not a “victim” for disgorgement purposes unless that investor suffered pecuniary harm, meaning a demonstrable financial loss. Because the district court never made that finding, it had no authority to order disgorgement.¹

The court read two provisions of the Securities Exchange Act together. Section 78u(d)(5) authorizes equitable relief “appropriate or necessary for the benefit of investors.” Section 78u(d)(7), added in 2021, separately authorizes disgorgement in any SEC action. The Second Circuit concluded that both provisions carry the same traditional equitable limits, including the requirement that identifiable victims actually exist and have lost money.³

The Liu v. SEC Backdrop

The Second Circuit’s reasoning builds on the Supreme Court’s 2020 decision in Liu v. SEC. Liu confirmed that disgorgement is available as equitable relief in SEC actions, but placed two limits on it: the amount cannot exceed the wrongdoer’s net profits after deducting legitimate business expenses, and the award must be “for victims.”⁴

Liu did not spell out what “for victims” requires in practice. Govil answered that question for the Second Circuit by tying the phrase to a specific showing of financial loss. In doing so, it turned an open piece of Liu into a hard prerequisite for any disgorgement award.

The 2021 Amendment That Complicated Everything

Before 2021, the SEC’s authority to seek disgorgement in federal court came from the general equitable relief language of Section 78u(d)(5). The National Defense Authorization Act for Fiscal Year 2021 then added Section 78u(d)(7), which for the first time named disgorgement explicitly.³

Courts have split on what that amendment did. Some read it as Congress codifying disgorgement on its own statutory terms, potentially freeing it from Liu’s equitable constraints. The Second Circuit read it the other way in Govil, treating the new provision as a confirmation of the old power that still carries the same equitable baggage. That interpretive fork is at the center of the current circuit split.

Where the Circuits Stand

Federal appeals courts have not agreed on whether the SEC must prove investors lost money before it can collect disgorgement:

Second Circuit (Govil): pecuniary harm is required. Without it, there are no “victims” and disgorgement is unavailable.¹
First Circuit (Navellier): pecuniary harm is not required. Disgorgement measures the wrongdoer’s unjust enrichment, not the investor’s loss.
Ninth Circuit (Sripetch): pecuniary harm is not a precondition. Disgorgement requires only an actionable interference with an investor’s legally protected interests.
Fifth Circuit (Hallam): the 2021 NDAA amendment was intended to curtail Liu’s restrictions altogether, so disgorgement is not bound by traditional equitable limits.

Because the Second Circuit covers New York, where much of the country’s securities enforcement is litigated, the Govil rule reaches a disproportionate share of major cases. A defendant in Manhattan has a defense that a defendant in Boston or San Francisco does not.

Why the Pecuniary Harm Requirement Bites

The rule sounds workable until it meets certain fraud patterns. In insider trading, a corporate insider trading on nonpublic information may earn millions, but identifying the specific investors on the other side of those trades and pinning down their losses is difficult. Market manipulation raises the same problem: harm is spread across thousands of traders and resists individualized proof.

Under Govil, the SEC may be unable to disgorge profits in cases where the fraud is clear and the gains are clear, but the losses are diffuse. Critics say this rewards more sophisticated schemes, since the harder the harm is to trace, the harder disgorgement becomes. Defenders of the rule respond that without a pecuniary harm requirement, disgorgement collapses into a penalty, which Congress authorized separately and hedged with different procedural protections.

What Disgorgement Does

Disgorgement requires a violator to give up the money made from the violation. It is not a fine and is not meant to punish; it strips the profit out of the misconduct. By default the money goes to the U.S. Treasury, but the SEC can create a Fair Fund to route it to harmed investors, and under Section 308(a) of the Sarbanes-Oxley Act it can combine civil penalties with disgorgement in a single fund for victims.⁵ If the SEC cannot obtain disgorgement in the first place, there is no fund to distribute.

What the Supreme Court Will Decide

The Supreme Court granted review in Sripetch v. SEC to resolve the split. The question is narrow: whether proving investor pecuniary harm is a prerequisite to a disgorgement award in an SEC enforcement action. Oral argument is set for April 20, 2026, with a decision expected by the end of the current term.²

Three outcomes are on the table. The Court could adopt the Second Circuit’s approach and require pecuniary harm in every federal district. It could side with the First and Ninth Circuits and let the SEC recover based on the wrongdoer’s unjust enrichment alone. Or it could go further and follow the Fifth Circuit’s reading that the 2021 NDAA amendment freed disgorgement from Liu’s equitable limits altogether.

What It Means Right Now

Until the Supreme Court rules, geography controls. In the Second Circuit, the SEC has to establish investor losses before it can obtain disgorgement, and defendants have a live argument that the agency has not met that burden. In the First, Fifth, and Ninth Circuits, that argument is foreclosed. For investors, the Govil rule keeps disgorgement tethered to actual victim recovery, but it also narrows the cases in which the SEC can claw money back at all. Whichever way the Supreme Court rules, the answer will be the same in every courtroom in the country by the end of the term.

1
Justia. SEC v. Govil
2
Supreme Court of the United States. Brief for the Respondent – Sripetch v. Securities and Exchange Commission
3
Office of the Law Revision Counsel. 15 USC 78u – Investigations and Actions
4
Supreme Court of the United States. Liu v. Securities and Exchange Commission
5
Office of the Law Revision Counsel. 15 U.S. Code 7246 – Fair Funds for Investors