Enforcement News: “Scalping”, Misappropriation and A Whole Lot MorePrint Article
- Posted on: Jul 21 2021
In today’s installment of Enforcement News, we examine an enforcement action brought by the Securities and Exchange Commission (“SEC” or the “Commission”) in the Southern District of New York against Aron Govil, the controlling shareholder and officer of two publicy traded companies – Cemtrex Inc. (“Cemtrex”) and Telidyne Inc. (“Telidyne”). According to the SEC, Govil committed a series of fraudulent activities, including scalping and the misappropriation of investor funds. To settle the action, Govil agreed to pay in excess of $1.2 million in disgorgement and penalties.
What Is Scalping?
Scalping refers to the purchase and sale of securities through arbitrage trading, as well as through the manipulation of the market.
In the former scenario, traders buy and sell securities “quickly, usually within seconds, using higher levels of leverage to place larger-sized trades in the hopes of achieving greater profits from minuscule price changes.” Chen, James, Scalper, Investopedia (Updated Mar. 18, 2021) (here).
In the latter scenario, a person is committing a fraud. Illegal scalping occurs when a person: (i) purchases shares of a security for his/her own account prior to recommending or touting that security to others; (ii) does not disclose in the recommendation or tout the full details of his/her ownership of the shares and his/her plans to sell the security at issue; and (iii) sells his/her shares following the dissemination of the recommendation or tout, which inflates the share price and trading volume of the security.
What Is Misappropriation?
Misappropriation is essentially a theft of money or assets. It occurs when a person uses another person’s money without authorization. Misappropriation of funds mirrors the crime of embezzlement, which is a crime committed by a person having a relationship of trust or fiduciary duty to another person and who steals that person’s money or property for his/her own personal gain. Both the SEC and FINRA have numerous rules governing how corporate actors and financial professionals must act to safeguard and protect the handling of investor and customers monies.
SEC v. Govil
On July 19, 2021, the SEC announced (here) that it reached an agreement to settle charges against Aron Govil (“Govil”) for his violation of the federal securities in the fraud of investors of Cemtrex and Telidyne.
According to the complaint filed by the SEC (here), Govil misappropriated over $7 million of Cemtrex investor funds between April 2016 and January 2018 to finance his personal business ventures and to pay his personal expenses. The alleged misappropriation of funds occurred in connection with two offerings made by Cemtrex, in which Govil represented to investors that the proceeds of the offering would be used for various corporate purposes, including new product development and acquisitions, as well as repaying outstanding debt and other general corporate purposes.
The SEC also alleged that Govil engaged in scalping – secretly selling Cemtrex stock while paying stock promoters to recommend that retail investors buy the company’s stock – and insider trading. In one instance, Govil allegedly paid a stock promoter to recommend Cemtrex stock by using the account of a defunct construction company Govil owned. The promoter only disclosed receiving a fee from that company, not Govil or Cemtrex. In another instance, Govil allegedly paid a promoter to recommend Cemtrex stock by transferring approximately 200,000 shares of Cemtrex common stock from a Govil Nominee Entity as a charitable contribution. In total, the SEC claimed that Govil obtained proceeds of more than $360,000 in connection with his illegal trading. The SEC said that Govil did not file any of the required disclosures with the SEC in connection with his Cemtrex trading (e.g., the Forms 4 and 5 required by Section 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 16a-3 promulgated thereunder).
The SEC further alleged that Govil, while serving as Telidyne’s chief executive officer, made material misrepresentations to investors regarding the company’s products. According to the SEC’s complaint, between at least April 2019 and May 2020, Govil falsely told investors that Telidyne, which purported to be a developer of mobile phone applications or “apps,” had developed the “Teli App,” which allowed users to transact business in cryptocurrencies from their mobile phones, and also had started work on an app to detect COVID-19. The SEC claimed that these statements were false because the Teli App did not have the stated cryptocurrency functionality and Telidyne had not started work on the COVID-19 detection app.
Commenting on the charges and settlement, Richard R. Best, Director of the SEC’s New York Regional Office, stated: “Govil allegedly flooded the market with paid-for buy recommendations for Cemtrex stock and made false claims about Telidyne’s development of mobile apps that would facilitate cryptocurrency transactions and help combat the coronavirus.”
Importantly, Best reminded investors to be “wary of online recommendations from unverified sources that appear to capitalize on the latest market trends and seem too good to be true.”
The SEC charged Govil with violations of the antifraud provisions of the federal securities laws, as well as violations of Section 16(a) of the Exchange Act, which requires corporate officers, directors, and major shareholders to disclose their transactions in their company’s stock. The SEC sought injunctive relief, an officer and director bar, a penny stock bar, disgorgement plus prejudgment interest, and civil penalties. Without admitting or denying the allegations, Govil consented to the entry of a final judgment that enjoins him from violating the charged provisions; imposes officer and director and penny stock bars; imposes, in connection with certain violations, disgorgement in the amount of $626,782, plus prejudgment interest thereon in the amount of $76,693.95; and imposes a civil penalty in the amount of $620,000. The judgment also provides for the court to order, upon motion of the Commission, additional disgorgement with prejudgment interest and/or penalty against Govil, if deemed appropriate. The proposed settlement is subject to court approval.