Penalty Can Exceed Insider's Own Profits, Circuit Says

, New York Law Journal


$100 dollar bills

An insider trader can be required to disgorge the profits he channeled to others above and beyond the profits he earned for himself, the U.S. Court of Appeals for the Second Circuit ruled Tuesday.

A divided Second Circuit said Joseph Contorinis, a convicted investment fund manager, was rightly ordered to repay the full amount he made by acquiring confidential information about the Albertson's supermarket chain.

Accepting the argument of the Securities and Exchange Commission, a two-judge majority said it didn't matter whether the motive is "direct economic profit, self-aggrandizement, psychic satisfaction from benefiting a loved one, or future profits by enhancing one's reputation as a successful fund manager," disgorgement is appropriate for an insider trader who has "engaged in fraud, secured a benefit thereby, and directed the profits of the fraud where he has chosen them to go" when trading for another's account.

Judges Gerard Lynch (See Profile) and Susan Carney (See Profile) upheld a lower court's order that Contorinis, the former Managing Director at Jeffries & Co., must pay back $7,260,604 in illegal insider trading profits.

Judge Denny Chin (See Profile) dissented in Securities and Exchange Commission v. Contorinis, 12-1723-cv.

Contorinis was convicted by a jury in 2010 before Judge Richard Sullivan (See Profile) of conspiracy and seven counts of securities fraud.

Evidence at the trial showed that Contorinis made several trades beginning in 2006 on information about a potential acquisition of Albertson's that he received from Nicos Stephanou, an employee of UBS Investment Bank.

The trades, made on behalf of customers in the Jeffries Paragon Fund, netted profits of more than $7.2 million for the fund and avoided losses of $5.3 million.

Sullivan sentenced Contorinis to serve six years in prison.

In the parallel civil proceeding brought by the SEC, Contorinis conceded his criminal verdict had a preclusive effect requiring a finding of civil liability. Sullivan ordered him to disgorge the $7.2 million.

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