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2nd Circuit Says SEC Can Recoup Money Even Where Insider Trader Didn’t Have Direct Benefits

 

Earlier this week, a divided (2-1) 2nd U.S. Circuit Court of Appeals passed a ruling that allows the U.S. Securities and Exchange Commission to cover an important loophole and move to recoup money from insider trading profits, where the insider trader did not have direct personal benefits.

Writing for the majority, Circuit Judge Gerard Lynch wrote, “Whether the defendant’s motive is direct economic profit, self-aggrandizement, 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.”

The ruling was given in the matter of Joseph Contorinis, former portfolio manager of Jefferies Group Inc., who had been convicted in 2010 for insider trading. Contorinis will have to pay back $7.26 million of alleged illegal profit he made for the firm’s Paragon Fund, along with an interest of $2.42 million.



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In the court of first instance, U.S. District Judge Richard Sullivan in Manhattan had ordered Contorinins to forfeit $427,875 in the associated criminal case. In its ruling, the 2nd Circuit upheld the penalty imposed by Sullivan.

Contorinis had argued that the profit made by Paragon due to his machinations was not within his personal control and he should not be liable to disgorge that profit.

In his dissent Judge Denny Chin agreed with Contorinis’ argument and said, “While Contorinis undeniably deserved to be punished, disgorgement was not the proper mechanism.” Chin was of the opinion that disgorgement should be remedial and not punitive.

Contorinins, 49, is currently serving a six-year prison term stemming from his conviction for securities fraud and conspiracy over trades in supermarket chain Albertsons Inc ahead of its buyout in 2006.

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