743 F.3d 296 (2nd Cir. 2014), 12-1723-cv, Securities and Exchange Commission v. Contorinis
|Citation:||743 F.3d 296|
|Opinion Judge:||Gerard E. Lynch, Circuit Judge :|
|Party Name:||SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. JOSEPH CONTORINIS, Defendant-Appellant. [*]|
|Attorney:||ALLAN A. CAPUTE (Anne K. Small, Michael A. Conley, Jacob H. Stillman, on the brief), Securities and Exchange Commission, Washington, D.C., for Plaintiff-Appellee. ROBERTO FINZI (Theodore V. Wells, Jr., Mark F. Pomerantz, Farrah R. Berse, on the brief), Paul, Weiss, Rifkind, Wharton & Garrison LLP...|
|Judge Panel:||Before: LYNCH, CHIN, and CARNEY, Circuit Judges. Judge Chin dissents in a separate opinion. Denny Chin, Circuit Judge :|
|Case Date:||February 18, 2014|
|Court:||United States Courts of Appeals, Court of Appeals for the Second Circuit|
Argued October 7, 2013.
[Copyrighted Material Omitted]
Defendant appeals from a judgment of the United States District Court for the Southern District of New York (Richard J. Sullivan, Judge), ordering him to disgorge all profits generated by insider trading, enjoining him from future violations of the securities laws, and ordering him to pay prejudgment interest on the disgorgement amount. Defendant was convicted at a criminal trial of securities fraud and conspiracy to commit securities fraud, based on his use of inside information to trade on behalf of an investment fund of which he was Managing Director. Subsequently, in this civil enforcement action, the district court granted the SEC's motion for summary judgment and, among other forms of relief, ordered defendant to disgorge all profits made by the insider trades, including those profits that accrued to the fund rather than to defendant personally. Because a tipper can be required to disgorge all gains obtained by his tippees through illegal insider trading even without direct economic benefit to the tipper, and because defendant gave the fund the benefit of his inside information just as does a tipper, we hold the district court did not abuse its discretion by ordering the defendant to disgorge all profits. We similarly identify no abuse of discretion in the district court's orders directing payment of prejudgment interest and issuing an injunction.
Joseph Contorinis appeals from a judgment of the United States District Court for the Southern District of New York (Richard J. Sullivan, Judge ) ordering him to disgorge $7,260,604 in profits from illegal insider trading, enjoining him from further violating the securities laws, and ordering him to pay prejudgment interest on the entire disgorgement amount. The primary issue presented is whether an insider trader who trades on behalf of another person or entity using funds he does not own, and thus produces illegal profits that he does not personally realize, can nevertheless be required to disgorge the full amount of illicit profit he generates from his illegal and fraudulent actions. Because our cases have established that tippers can be required to disgorge profits realized by their tippees' illegal insider trading, and this case is distinguishable only insofar as Contorinis himself executed the fraudulent trades rather than leave that task to a tippee, we conclude that the district court was empowered to enter the disgorgement order, and did not abuse its discretion in doing so. Additionally, we find no abuse of discretion in the district court's imposition of an injunction on Contorinis or in its order that Contorinis pay prejudgment interest on the disgorgement amount. We therefore affirm the district court's decision.
Defendant-appellant Joseph Contorinis, a Managing Director at Jeffries & Company, Inc. (" Jeffries" ), executed several illegal insider trades involving the stock of the supermarket chain Albertson's, Inc.
(" Albertson's" ), using material nonpublic information received from Nicos Stephanou, an employee of UBS Investment Bank (" UBS" ). The offense had its origins in September 2005, when Stephanou informed Contorinis that UBS would be advising on a major financial acquisition involving Albertson's. As a UBS employee involved in the transaction, Stephanou was privy to confidential material information regarding the acquisition, and Contorinis asked Stephanou to keep him apprised of developments.
In January 2006, as negotiations involving the acquisition of Albertson's unfolded, Stephanou on several occasions disclosed material inside information regarding the acquisition to Contorinis before the information became public. Relying on that information, Contorinis made several opportune trades in Albertson's stock. Contorinis did not execute these trades with his personal assets, but rather did so on behalf of the Jeffries Paragon Fund (the " Paragon Fund" ), of which Contorinis was a co-manager and over which he had investment control. As a result of these insider trades the Paragon Fund realized profits of $7,304,738, and avoided losses of $5,345,700.
In February 2009, Contorinis was indicted on one count of conspiracy to commit securities fraud and nine counts of securities fraud. A jury found him guilty of the conspiracy and of seven counts of securities fraud, and on October 6, 2010, he was sentenced to six years of imprisonment and ordered to pay $12,650,438 (the combined value of the Paragon Fund's realized profits and avoided losses) in criminal forfeiture penalties.
On appeal, this Court affirmed Contorinis's conviction but vacated the forfeiture order, remanding to the district court to redetermine the proper amount. United States v. Contorinis, 692 F.3d 136, 148 (2d Cir. 2012). We observed that neither the language of the criminal forfeiture statute nor Circuit case law supported the proposition that a defendant must forfeit proceeds that " go directly to an innocent third party and are never possessed by the defendant." Id. at 147. Rather, criminal forfeiture penalties are " usually based on the defendant's actual gain." Id. at 146. The district court's initial forfeiture calculation reflected the total benefit to the Paragon Fund, not the gains accruing to Contorinis himself. On remand, the district court found that Contorinis's personal profit, in the form of linked compensation from the trades, amounted to $427,875, and ordered forfeiture of that amount.
Following the filing of the criminal indictment, the Securities and Exchange Commission (" SEC" ) brought this civil action against Contorinis in the United States District Court for the Southern District of New York, seeking disgorgement of $7,260,604 in unlawful profits obtained by the Paragon Fund (equivalent to the total profit from insider trading less trading commission costs), as well as additional civil monetary penalties and an injunction against future securities law violations. After Contorinis was convicted at his criminal trial, the SEC moved for summary judgment, and Contorinis, without admitting to the underlying offense, acknowledged that the jury verdict had a preclusive effect requiring a finding of civil liability. On February 3, 2012, the district court granted the SEC's summary judgment motion against Contorinis and granted relief in the forms requested by the SEC, permanently enjoining Contorinis from violating the securities laws in the future, ordering Contorinis to disgorge $7,260,604 (less any amount paid pursuant to the criminal forfeiture), and imposing a civil penalty of $1,000,000. In a superseding judgment of February 29, 2012, the
district court reaffirmed those penalties, and furthermore ordered Contorinis to pay $2,485,205 in prejudgment interest on the disgorgement amount.1
Contorinis timely brought this appeal, challenging the judgment insofar as it required him to disgorge the entire amount obtained by the Paragon Fund through insider trading and to pay prejudgment interest on the disgorgement amount, and permanently enjoined him from violating the securities laws.
I. Disgorgement of Profit Accruing to the Paragon Fund
Disgorgement serves to remedy securities law violations by depriving violators of the fruits of their illegal conduct. See SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997); see also SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987) (" The paramount purpose of enforcing the prohibition against insider trading by ordering disgorgement is to make sure that wrongdoers will not profit from their wrongdoing." ). Disgorgement is an equitable remedy, imposed to " forc[e] a defendant to give up the amount by which he was unjustly enriched." FTC v. Bronson Partners, 654 F.3d 359, 372 (2d Cir. 2011), quoting SEC v. Commonwealth Chem. Secs., Inc., 574 F.2d 90, 102 (2d Cir. 1978). By forcing wrongdoers to give back the fruits of their illegal conduct, disgorgement also " has the effect of deterring subsequent fraud." SEC v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006) (" Cavanagh II" ). Because disgorgement does not serve a punitive function, the disgorgement amount may not exceed the amount obtained through the wrongdoing. Id. at 116 n.25. At the same time, however, as it operates to make the illicit action unprofitable for the wrongdoer, disgorgement need not serve to compensate the victims of the wrongdoing. Bronson, 654 F.3d at 374. Because disgorgement is not compensatory, it " forces a defendant to account for all profits reaped through his securities law violations and to transfer all such money to the court, even if it exceeds actual damages to the victim." Cavanagh II, 445 F.3d at 117. Because disgorgement's underlying purpose is to make lawbreaking unprofitable for the law-breaker, it satisfies its design when the lawbreaker returns the fruits of his misdeeds, regardless of any other ends it may or may not accomplish.
" The district court has broad discretion not only in...
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