The U.S. Securities and Exchange Commission won an appeals court ruling that may allow it to collect illegal proceeds from money managers who engage in insider trading even when their firms got all the profit.
The U.S. Court of Appeals in Manhattan yesterday upheld a lower court’s finding in an SEC lawsuit that Joseph Contorinis, an ex-Jefferies Paragon Fund money manager convicted of insider trading in 2010, must turn over $7.2 million he made for the fund and an additional $2.5 million in interest. The decision could affect future insider trading cases and offers the government “another avenue” to put money managers on the hook for profits, said Marc Agnifilo, a New York defense lawyer who wasn’t involved in the case.
“Although Contorinis did not pocket the profits from his trades, it was he who utilized the inside information, executed the trades, and secured the resulting profit for the benefit of his clients,” the appeals panel said in its 2-1 ruling.
Contorinis, 49, is serving a six-year prison sentence for his role in the scheme. Jurors found that he traded on tips from an associate director of mergers and acquisitions at Zurich-based UBS AG. (UBSN)
The former associate director, Nicos Stephanou, who testified against Contorinis in exchange for leniency, said he passed inside tips to the fund manager about Cerberus Capital Management LP’s bid to buy grocer Albertson’s Inc. in 2006. At the time, Contorinis’s hedge fund held more than $70 million in stock in Albertson’s, then the second-biggest U.S. grocer.
In 2012, the appeals court threw out a judge’s order in Contorinis’s criminal case requiring him to forfeit $12.6 million in profits and losses avoided by the fund from his insider-trading activities, because the gains were “never possessed or controlled by himself.”
The lower court later ordered him to forfeit $427,875 in the criminal case.
Yesterday’s ruling shows that the court may allow gains from insider trading on behalf of funds to be recovered from individuals in civil proceedings even if that money can’t be sought in criminal forfeiture actions, said Jonathan Marks, another New York defense lawyer who isn’t involved in the case.
“Criminal forfeiture will be limited to the amount of money that went into their pockets,” Marks said of insider trading defendants. “But since it is very common for the SEC to bring a parallel civil action in an insider trading case, they still have a lot to worry about.”
Roberto Finzi, a lawyer for Contorinis, didn’t immediately respond to a phone call seeking comment on the ruling.
In yesterday’s ruling, the appeals court said case law already has established that people who provide tips for insider trading can be ordered to disgorge profits even if they didn’t make money from the transaction.
“Indeed, to the extent that this case can be distinguished from the tipper-tippee situation, the case for disgorgement is stronger here,” the court said. “Contorinis had greater control over the Paragon Fund’s illegal profits than a tipper does over a tippee.”
In a dissent, U.S. Circuit Judge Denny Chin, who served on the same panel that rejected the criminal forfeiture amount for Contorinis, said that the disgorgement order “penalized” the defendant rather than returning him to the status quo.
Disgorgement “is not intended to be punitive; it is remedial in nature,” Chin said.
The case is SEC v. Contorinis, 12-01723, U.S. Court of Appeals for the Second Circuit (Manhattan).