By Jonathan Stempel
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
By a 2-1 vote, the 2nd U.S. Circuit Court of Appeals in New
York said former Jefferies Group Inc portfolio manager Joseph
Contorinis, convicted in 2010 of insider trading, 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.
"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 for the
The decision could affect 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.
"This is a huge decision, and ratchets up substantially the
deterrent effect of prosecutions," James Cox, a law professor at
Duke University, said in a phone interview.
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.
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.
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 civil case.
Roberto Finzi, a partner at Paul, Weiss, Rifkind, Wharton &
Garrison who represents Contorinis, did not immediately respond
to requests for comment. SEC spokesman John Nester said the
regulator is pleased with the decision.
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 majority, however, Lynch said
there was "no injustice" in holding Contorinis liable, given
that 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."
Cox, the Duke professor, said "the level of profits that
could be subject to disgorgement by employees could be so huge
that it would be seen as a punishment."
Stephanou pleaded guilty to securities fraud and conspiracy
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.