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NEW YORK Feb 18 A divided federal appeals court on Tuesday strengthened the U.S. Securities and Exchange Commission's ability to recover insider trading profit from people who do not personally benefit directly from their alleged illegal trades.
By a 2-1 vote, a panel of the 2nd U.S. Circuit Court of Appeals in New York said former Jefferies Group Inc portfolio manager Joseph Contorinis must give up $7.26 million of alleged illegal profit that he made for the firm's Paragon Fund, plus $2.42 million in interest, in an SEC civil forfeiture case.
"Whether the defendant's motive is direct economic profit, selfaggrandizement, psychic satisfaction from benefiting a loved one, or future profits by enhancing one's reputation as a successful fund manager, the insider trader who trades for another's account has engaged in a fraud, secured a benefit thereby, and directed the profits of the fraud where he has chosen them to go," Circuit Judge Gerard Lynch wrote.
The decision could have an impact on how much people convicted of insider trading on behalf of hedge funds may have to pay in related SEC civil cases. Many of these cases are in New York, which is part of the 2nd Circuit.
Contorinis, 49, is serving a six-year prison term following his October 2010 conviction for securities fraud and conspiracy over trades in supermarket chain Albertsons Inc ahead of its 2006 buyout by Supervalu Inc, CVS Corp and investors led by Cerberus Capital Management LP.
U.S. District Judge Richard Sullivan in Manhattan, who oversaw the criminal and civil cases, previously ordered Contorinis to forfeit $427,875 in the criminal case. Tuesday's decision upheld the penalty in the SEC case.
Roberto Finzi, a partner at Paul, Weiss, Rifkind, Wharton & Garrison who represents Contorinis, did not immediately respond to a request for comment. SEC spokesman John Nester said the regulator is pleased with the decision.
Prosecutors said Contorinis' trades were based on tips from Nicos Stephanou, a friend and former banker at UBS AG, which was advising the Cerberus group on the buyout.
In his appeal of the civil penalty, Contorinis said he should not have to give up, or "disgorge," profit he made for Paragon because he did not personally control that profit.
Writing for the 2nd Circuit, however, Lynch said there was "no injustice" in holding Contorinis civilly liable, given how successful trading could boost his reputation and pay.
Circuit Judge Denny Chin dissented. He said disgorgement is supposed to be remedial rather than punitive, and that "while Contorinis undeniably deserved to be punished, disgorgement was not the proper mechanism."
Stephanou pleaded guilty to securities fraud and conspiracy charges and testified against Contorinis. After spending 19 months in jail, Stephanou was sentenced by Sullivan to time served.
According to the Federal Bureau of Prisons, Contorinis is housed at the Beckley prison complex in Beaver, West Virginia, and not eligible for release until December 2015.
Jefferies is now part of Leucadia National Corp, and CVS is now known as CVS Caremark Corp.
The case is SEC v. Contorinis, 2nd U.S. Circuit Court of Appeals, No. 12-1723.
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