SEC gains power to take profit made for firms by insider trading

An appeals court rules that SEC can collect illegal proceeds from money managers even when firms got the profit

Feb 19, 2014 @ 9:44 am

+ Zoom

The 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 2nd U.S. Circuit 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.

Mr. 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 UBS AG.

The former associate director, Nicos Stephanou, who testified against Mr. Contorinis in exchange for leniency, said he passed inside tips to the fund manager about Cerberus Capital Management's bid to buy grocer Albertson's Inc. in 2006. At the time, Mr. 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 Mr. 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.

Tuesday'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,” Mr. 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 Mr. Contorinis, didn't immediately respond to a phone call seeking comment on the ruling.


In Tuesday's 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 Court Judge Denny Chin, who served on the same panel that rejected the criminal forfeiture amount for Mr. 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,” Judge Chin said.

(Bloomberg News)


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 17


Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Latest news & opinion

Morgan Stanley joins competitors in cutting back on recruiting

Wirehouse said it intends to increase its investment in existing talent.

DOL Fiduciary Rule: What you need to know about Acosta's decision

Labor Secretary Alexander Acosta confirmed that the agency's fiduciary rule will become applicable on June 9. Find out what advisers and firms should know when it goes into effect.

Acosta declines to extend delay of DOL fiduciary rule

Labor Secretary finds no legal basis to delay implementation; rule to become applicable June 9

Phyllis Borzi says opponents of DOL fiduciary rule face uphill climb to further delay or dilute it

Former assistant Labor secretary who crafted the rule says President Trump won't be able to get rid of it simply because he doesn't like it.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print