12‐1723‐cv SEC v. Contorinis
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
August Term, 2013
(Argued: October 7, 2013 Decided: February 18, 2014)
Docket No. 12‐1723‐cv
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff‐Appellee,
— v. —
JOSEPH CONTORINIS,
Defendant‐Appellant.*
B e f o r e:
LYNCH, CHIN, and CARNEY, Circuit Judges.
__________________
* The Clerk of Court is respectfully directed to amend the official caption in this case to conform with the caption above. 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.
2 AFFIRMED.
Judge Chin dissents in a separate opinion.
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, New York, NY, for Defendant‐Appellant.
GERARD E. LYNCH, Circuit Judge:
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
3 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.
BACKGROUND
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.
4 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
5 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
6 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.
1 On September 24, 2013, the SEC informed the Court that the parties had agreed to adjust the prejudgment interest amount to reflect the fact that, after the sentence was imposed, Contorinis had posted $3,000,000 as bail, of which the government, and not Contorinis, had the use between October 7, 2010 and March 29, 2011. That adjustment reduces the prejudgment interest award from $2,485,205 to $2,417,940. The agreement did not resolve any of the other issues in dispute between the parties, including Contorinis’s contention that he should not be required to pay prejudgment interest at all. September 24, 2013 Letter, SEC v. Contorinis, No. 12‐1723, ECF No. 122.
7 DISCUSSION
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. Sec., 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.
8 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 determining whether or
not to order disgorgement but also in calculating the amount to be disgorged.”
SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474‐75 (2d Cir. 1996). Accordingly,
we review a disgorgement order for abuse of that discretion. SEC v. Posner, 16
F.3d 520, 522 (2d Cir. 1994).
Contorinis argues that because he never personally controlled the profits
that accrued to the Paragon Fund – although he could make investment
decisions, he did not control disbursement of the proceeds – ordering him to
disgorge the entire amount gained through his insider trading is a misapplication
of the disgorgement principle. The argument identifies an ambiguity in the
concept of disgorgement. Disgorgement instantiates the equitable principle that
9 wrongdoers should not benefit from their misdeeds, and thus should relinquish
any profits obtained from them. On the one hand, Contorinis argues that
because he illegally traded not for his own account with his own funds, but
rather on behalf of an investment fund that he managed and whose assets
belonged to third‐party investors, he did not personally enjoy the proceeds of the
resulting gain (beyond the increase in his compensation linked to the
performance of the Paragon Fund). On the other hand, 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 question is thus posed whether an insider trader can be
required to disgorge not only the profit that he personally enjoyed from his
exploitation of inside information, but also the profits of such exploitation that he
channeled to friends, family, or clients. Contorinis argues, in effect, that one can
only “disgorge” what one has personally “swallowed”; the SEC argues that a
fraudster should be compelled to return not only those profits from the fraud that
he has reserved for his own use, but also those that he has bestowed on others.
In resolving this dispute, we do not write on a clean slate. Our prior cases
indicate that an insider trader may be ordered to disgorge not only the unlawful
10 gains that accrue to the wrongdoer directly, but also the benefit that accrues to
third parties whose gains can be attributed to the wrongdoer’s conduct. We have
long applied that principle in the tipper‐tippee context. Thus, in SEC v. Warde
we held that, in the determination of a disgorgement amount, “[a] tippee’s gains
are attributable to the tipper, regardless whether benefit accrues to the tipper.”
151 F.3d 42, 49 (2d Cir. 1998). That principle has deep roots in parallel civil
remedial structures. For example, in Elkind v. Ligget & Myers, Inc., 635 F.2d 156,
165 (2d Cir. 1980), we concluded that “[t]rades by tippees are attributed to the
tipper” in determining liability for damages, and in SEC v. Texas Gulf Sulphur
Co., 446 F.2d 1301, 1308 (2d Cir. 1971), the foundational case for insider trading
liability, we required a tipper to make common‐law civil restitution “for the
profits derived by his tippees.”2
2 In his dissenting opinion, Judge Chin attempts to distinguish the instant case from our prior cases involving tippers by suggesting that tippers can be held liable for tippees’ gains because “the tipper and tippee are concerted actors, jointly engaging in fraudulent activity.” Dissent, post, at 5. We respectfully disagree. We have found tippers liable for tippees’ gains without any indication that the tippee acted in culpable concert with the tipper. See, e.g., SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833, 852‐53 (2d Cir. 1968) (“As [defendant tipper’s] ‘tippees’ are not defendants in this action, we need not decide whether, if they acted with actual or constructive knowledge that the material information was undisclosed, their conduct is as equally violative of [Rule 10b‐5] as the conduct of their insider source, though we note that it certainly could be equally
11 That rule makes perfect sense. A potential tipper in possession of inside
information who seeks to confer a benefit on a friend or to curry favor with
someone who can confer reciprocal benefits in the future can do so either by
trading on this information himself and passing the profit on to the intended
beneficiary, or by passing the information to the beneficiary and thus allowing the
tippee to realize the profit himself. In the former case, the insider would
unquestionably be liable to disgorge the profit; disgorgement is required whether
the insider trader has put his profits into a bank account, dissipated them on
transient pleasures, or given them away to others.3 It would make little sense to
reprehensible”); Tex. Gulf Sulphur, 446 F.2d at 1308 (in further legal proceedings, same defendant tipper required to “make restitution for the profits derived by his [non‐defendant] tippees”); Elkind, 635 F.2d at 161 (tipper corporation held liable for tippee traders’ gains, even where non‐party tippee traders’ culpability was never addressed). Similarly, in Warde, 151 F.3d at 49, the defendant was required to disgorge proceeds accruing to his wife’s account, without any indication his wife acted in concert with him. Thus, the fact that “the Fund did not act in concert with Contorinis,” Dissent, post, at 7, has no bearing on whether Contorinis can be held liable for the unlawful gains that he made on the Fund’s behalf. 3 One ramification of this line of reasoning is that we have long deemed specific tracing unnecessary in ordering disgorgement for securities fraud. See Bronson, 654 F.3d at 374 (articulating the principle and collecting cases); see also SEC v. Banner Fund Int’l, 211 F.3d 602, 617 (D.C. Cir. 2000) (“[D]isgorgement is an equitable obligation to return a sum equal to the amount wrongfully obtained, rather than a requirement to replevy a specific asset”).
12 allow the insider to escape disgorgement when he gives away not the proceeds of
a trade predicated on his insider knowledge, but rather the knowledge itself to
others who he knows will spin the information into gold by trading on it
themselves.
But if that is so, and our precedents confirm that it is, it must follow that
the insider who, rather than passing the tip along to another, directly trades for
that other’s account must equally disgorge the benefit he obtains for his favored
beneficiary. Indeed, that was the actual situation in Warde, in which the
defendant utilized an account belonging to his wife, over which he had control,
to make trades based on material nonpublic information. 151 F.3d at 49.
Whether he traded on his own account and gave the profit to his wife, gave the
information to his wife to enable her to trade on it, or executed the trades on his
own authority using his wife’s account such that the proceeds accrued to her, the
wrong committed by the defendant would be the same, as would the economic
result. Whether the defendant’s motive is direct economic profit, self‐
aggrandizement, psychic satisfaction from benefitting 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.
13 Thus, given our precedent establishing that tippers may be held liable to
disgorge the gains of their tippees, it would be inconsistent to deny the district
court the discretion to impose equivalent liability for conduct such as
Contorinis’s. Indeed, to the extent that this case can be distinguished from the
tipper‐tippee situation, the case for disgorgement is stronger here. The tipper in
possession of material nonpublic information who passes that inside information
to another, even with full knowledge that the tippee will use the information to
trade, has no control over, and likely no knowledge of, the extent to which the
tippee will trade. The tippee may make a modest wager or take a deep plunge;
she may act at the ideal moment, or sacrifice some potential profit by trading
prematurely or delaying too long. The tipper is liable for the tippee’s gains,
whatever they may be.
In contrast, Contorinis had greater control over the Paragon Fund’s illegal
profits than a tipper does over a tippee. Contorinis both obtained the inside
information that facilitated the illegal trade and executed the trade on behalf of
the Paragon Fund. He controlled the size and timing of the trades, and was then
entirely responsible for the size of the Paragon Fund’s gains. Moreover, it was
Contorinis’s business to make trades on behalf of the Paragon Fund. Not only did
14 he profit directly from the additional incentive compensation he received based
on his successful (but corrupt) trades, but by making profitable trades on behalf
of his clients he enhanced his reputation and increased the likelihood of his
receiving future benefits as a fund manager. In this way, Contorinis’s case is
even closer than a tipper’s to the bedrock disgorgement case of the insider who
executes illegal trades using his own money, and donates the profit to a third
party. There is no injustice, therefore, in making him responsible for the profits
he made for others, as well as for himself, through his fraudulent insider trades.
It thus necessarily follows from existing Circuit precedent, and from the
logic of the disgorgement remedy, that Contorinis may be held responsible for
disgorgement of the Paragon Fund’s illegal profits. To conclude otherwise
would permit greater liability in a relationship (tipper‐tippee) which is, in all
material respects, more tenuous than the relationship here (controlling manager‐
financial vehicle). Our conclusion is required to maintain consistency in the
remediation of securities law violations.
We thus conclude that the district courts possess discretion to allocate
disgorgement liability for insider trading to those responsible for the illegal acts,
including to those with investment power over third‐party accounts used to
15 make illegal investments as well as to tippers. Our conclusion prevents insider
traders from evading liability by operating through or on behalf of third parties.
As we said in Warde, in the absence of the discretion to allocate liability to
wrongdoers, “[t]he value of the rule in preventing misuse of inside information
would be virtually nullified [because] those in possession of such information,
although prohibited from trading for their own accounts, [would be] free to use
the inside information on trades to benefit their families, friends, and business
associates.” 151 F.3d at 49. See also Tex. Gulf Sulphur, 446 F.2d at 1308
(“[W]ithout such a remedy, insiders could easily evade their duty to refrain from
trading on the basis of inside information. Either the transactions so traded could
be concluded by a relative or an acquaintance of the insider, or implied
understandings could arise under which reciprocal tips between insiders in
different corporations could be given.”).
We do not conclude that district courts must impose disgorgement liability
for insider trading upon wrongdoers when the gains accrue to innocent third
parties, but rather that the district courts may elect to do so in appropriate
16 circumstances.4 It is well established that district courts have broad discretion to
impose disgorgement liability, First Jersey, 101 F.3d at 1474‐75, and that liability
should fall upon the wrongdoer in cases of uncertainty. “The amount of
disgorgement ordered need only be a reasonable approximation of profits
causally connected to the violation. . . . [A]ny risk of uncertainty in calculating
disgorgement should fall upon the wrongdoer whose illegal conduct created that
uncertainty.” Id. at 1475, quoting SEC v. Patel, 61 F.3d 137, 139‐40 (2d Cir. 1995)
(internal citation, quotation marks, and alterations in First Jersey omitted).
Contorinis’s argument that he should be forced to disgorge only the
amounts that he directly obtained as personal pecuniary benefit seeks to
4 When certain conditions are met, innocent third parties (“relief defendants”) may be ordered to disgorge the proceeds generated by the illegal conduct of a fraudulent investor. However, imposing such liability upon innocent third parties is elective rather than mandatory. See, e.g., SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1998) (“Cavanagh I”) (“Federal courts may order equitable relief against a person who is not accused of wrongdoing in a securities enforcement action where that person: (1) has received ill‐gotten funds; and (2) does not have a legitimate claim to those funds.”) (emphasis added). Here the SEC could have sought to recover illegal gains from the Paragon Fund as a relief defendant, but chose, as our case law has indicated is an established and legitimate alternative, to seek damages from the wrongdoer Contorinis directly. While many factors may be relevant to deciding what remedies are appropriate in particular circumstances, we note that one argument in favor of requiring disgorgement from the trader is that he is culpable, while the third‐party recipients, though unjustly enriched, may have been unaware of any wrongdoing.
17 undermine this discretion by conflating a central, well‐established principle in
disgorgement law – that “the court may only exercise its equitable power only
over property causally related to the wrongdoing,” SEC v. First City Fin. Corp.,
890 F.2d 1215, 1231 (D.C. Cir. 1989) – with the proposition, unsupported in our
case law, that the wrongdoer need disgorge only the financial benefit that accrues
to him personally.5 Yet as our consideration of the tipper‐tippee context
5 No other circuit has spoken to the precise question of disgorgement liability for an insider trader who had trading power but not disbursement control over a financial vehicle whose funds were used to perpetuate the fraud. Circuits which have considered related issues are mixed regarding the extent to which a party can be ordered to disgorge total gain from an unlawful act, when the party has not personally received the full benefit of the wrongdoing. A district court in the Sixth Circuit concluded that “[w]hen addressing the amount of money [from fraudulent securities transactions] that a defendant must disgorge, the Sixth Circuit has held, by implication, that the entire amount of profits which were illicitly received must be disgorged.” SEC v. Great Lakes Equities Co., 775 F. Supp. 211, 214 (E.D. Mich. 1991). The court further stated
[t]he benefit or unjust enrichment of a defendant includes not only what it gets to keep in its pocket after the fraud, but also the value of the other benefits the wrongdoer receives through the scheme. Thus, in insider trading cases, a tipper must disgorge not only his own profits but also any profits made by his tippees, even if the tipper did not receive any tangible kickback from those tippees.
Id. To support this proposition, the district court cited, inter alia, SEC v. Blavin, which states that “[d]isgorgement orders are not limited to the confiscation of trading profits . . . The district court was well within its equitable power to ‘make violations unprofitable’ . . . .” 760 F.2d 706, 713 (6th Cir. 1985), quoting SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1104 (2d Cir. 1972). See also SEC v. Sierra Brokerage Servs. Inc., 608 F. Supp.
18 demonstrates, that proposition is without foundation. The amount a court may
order a wrongdoer to disgorge may not exceed the total amount of gain from the
illegal action, but that does not entail that the gain must personally accrue to the
wrongdoer. As our consideration of the tipper context demonstrates, to so limit
the power of courts to order disgorgement would permit evasion of the
prohibition on insider trading by allowing the direction of benefits to
acquaintances.
2d 923, 968 (S.D. Ohio 2009), quoting Great Lakes Equities and citing Blavin to support the proposition that, by controlling Sixth Circuit precedent, a violator can be ordered to disgorge the entire amount of profits. Outcomes in the Ninth Circuit suggest that a defendant’s obligation to disgorge all profits depends upon the defendant’s level of responsibility for the unlawful enrichment. Where an unjustly enriched defendant was unaware of the illicit conduct of the wrongdoing third party, the court limited the disgorgement to an amount “approximately equal to the unjust enrichment” enjoyed by the defendant. Hateley v. SEC, 8 F.3d 653, 656 (9th Cir. 1993). However, where a defendant had violated securities laws and enjoyed “substantial personal benefit from the infusion of the illegally obtained proceeds” into a third party’s account, the court concluded the violator could be required to disgorge the total profit from the illegal conduct. SEC v. First Pac. Bancorp, 142 F.3d 1186, 1192 (9th Cir. 1998). In contrast, the Fifth Circuit has vacated a district court’s order that individual, knowing participants in an illegal securities scheme disgorge amounts beyond their personal gain, limiting each violator’s disgorgement to “the amount of the fee realized by each defendant for his assistance in executing the fraud.” SEC v. Blatt, 583 F.2d 1325, 1336 (5th Cir. 1978). The Fifth Circuit stated “[t]he court’s power to order disgorgement extends only to the amount with interest by which the defendant profited from his wrongdoing. Any further sum would constitute a penalty assessment.” Id. at 1335.
19 Moreover, limiting disgorgement amounts to the direct pecuniary benefit
enjoyed by the wrongdoer would run contrary to the equitable principle that the
wrongdoer should bear the risk of any uncertainty affecting the amount of the
remedy. A wrongdoer’s unlawful action may create illicit benefits for the
wrongdoer that are indirect or intangible. Because it would be difficult to
quantify the advantages of an enhanced reputation or the psychic pleasures of
enriching a family member, to require precise articulation of such rewards in
calculating disgorgement amounts would allow the wrongdoer to benefit from
such uncertainty. As our precedents make clear, the risk of uncertainty in the
amount of disgorgement is not properly so allocated. See First Jersey, 101 F.3d at
1475; Patel, 61 F.3d at 140. That is not to say the amount of disgorgement a court
can order from a wrongdoer is bounded only by the court’s discretion; to the
contrary, it is set at the maximum of the total gain from the illicit action. Here,
that is precisely that amount of gain that the district court ordered disgorged.
Contorinis wishes us to replace that limit on disgorgement amounts – established
both by precedent and by the logic of disgorgement – with a new principle that
would limit the maximum disgorgement amount to the direct pecuniary benefit
to the wrongdoer. We decline to do so.
20 Contorinis further argues that our recent decision in his criminal appeal
limiting the extent of the criminal forfeiture to his personal gain, Contorinis, 692
F.3d at 147‐148, should be applied in the civil disgorgement context. That
argument is unavailing. As we noted in deciding Contorinis’s criminal appeal,
criminal forfeiture “serves no remedial purpose, is designed to punish the
offender, and cannot be imposed upon innocent owners.” Id. at 146, quoting
United States v. Bajakajian, 524 U.S. 321, 332 (1998). Disgorgement, in contrast, is
a civil remedy which serves the remedial purpose of preventing unjust
enrichment.
Thus, while both criminal forfeiture and disgorgement serve to deprive
wrongdoers of their illicit gain, the two remedies reflect different characteristics
and purposes – disgorgement is an equitable remedy that prevents unjust
enrichment, and criminal forfeiture a statutory legal penalty imposed as
punishment. See SEC v. Lorin, 869 F. Supp. 1117, 1121 (S.D.N.Y. 1994) (“I will not
label disgorgement a ‘fine, penalty, or forfeiture’ in light of the operation of
disgorgement, which merely deprives one of wrongfully obtained proceeds”),
citing Tex. Gulf Sulphur, 446 F.2d at 1308; see also SEC v. Williams, 884 F. Supp.
28, 30‐31 (D. Mass. 1995) (holding the same and collecting cases). One
21 ramification in particular of this qualitative divergence between disgorgement
and criminal forfeiture nullifies Contorinis’s argument. As disgorgement is
designed to equitably deprive those who have obtained ill‐gotten gains of
enrichment, it may be imposed upon innocent third parties who have received
such ill‐gotten funds and have no legitimate claim to them. Cavanagh I, 155 F.3d
at 136, citing SEC v. Colello, 139 F.3d 675, 677 (9th Cir. 1998). That is consistent
with disgorgement’s remedial purpose – disgorgement is imposed not to punish,
but to ensure illegal actions do not yield unwarranted enrichment even to
innocent parties.
However, unjust enrichment may also be prevented by requiring the
violator to disgorge the unjust enrichment he has procured for the third party.
As our case law has indicated (and as our opinion here confirms), when third
parties have benefitted from illegal activity, it is possible to seek disgorgement
from the violator, even if that violator never controlled the funds. The logic of
this, as more fully articulated supra, is that to fail to impose disgorgement on such
violators would allow them to unjustly enrich their affiliates. Thus, ordering a
violator to disgorge gain the violator never possessed does not operate to
magnify penalties or offer an alternative to fines, but serves disgorgement’s core
22 remedial function of preventing unjust enrichment. District courts possess the
equitable discretion to determine whether disgorgement liability should fall upon
third parties or violators, a responsibility concordant with the district courts’
broad discretion to assay disgorgement more generally.
Moreover, unlike disgorgement, which is a discretionary, equitable
remedy, criminal forfeiture is mandatory, and a creature of statute. Thus, unlike
the criminal forfeiture case, the district court’s discretion in determining
disgorgement is not confined by precise contours of statutory language, but
rather serves the broader purposes of equity. There is nothing inequitable about
requiring a person who created an unjust gain by fraudulently trading on
material nonpublic information, and allocated that gain, for reasons of his own,
to beneficiaries that he chose, to return that gain to the public by disgorging the
illegal benefits he obtained and directed.
Therefore, the substantive distinctions between the liability imposed by the
disgorgement remedy and the criminal forfeiture penalty, and the subsequently
differing impacts on violators, reflect the diversity of corrective action necessary
to enforce the securities regime. As forfeiture is punitive in nature, it would be
irrational to impose it upon innocent third parties, whereas disgorgement’s
23 purpose – the prevention of unjust enrichment – would be thwarted if securities
law violators were able to pass their illicit gains off to affiliates. To expect the
same outcomes from legal concepts with such different characteristics is
unrealistic, and Contorinis’s efforts to analogize his criminal forfeiture penalty
and disgorgement remedy are unavailing.
We therefore conclude that the district court did not abuse its discretion in
requiring Contorinis to disgorge profits of $7,260,604 obtained by the Paragon
Fund through his illegal insider trading.
II. Payment of Prejudgment Interest
Contorinis additionally challenges the district court’s order requiring him
to pay $2,417,940 in prejudgment interest, reflecting interest that has accrued on
the entire disgorgement amount. A decision to grant prejudgment interest is
“confided to the district court’s broad discretion, and will not be overturned on
appeal absent an abuse of that discretion.” Endico Potatoes, Inc. v. CIT
Group/Factoring, Inc., 67 F.3d 1063, 1071‐72 (2d Cir. 1995), quoting Commercial
Union Assurance Co. v. Milken, 17 F.3d 608, 613‐14 (2d Cir. 1994). The decision
to award prejudgment interest is governed by the equities, reflecting
“considerations of fairness” rather than “a rigid theory of compensation,” Blau v.
24 Lehman, 368 U.S. 403, 414 (1962), and we have concluded that the failure of
securities law violators to enjoy a profit “does not, standing alone, make it
inequitable to compel them to pay interest.” Rolf v. Blyth, Eastman Dillon & Co.,
Inc., 637 F.2d 77, 87 (2d Cir. 1980).
Prejudgment interest on a disgorgement amount is intended to deprive the
wrongdoer of the benefit of holding the illicit gains over time by reasonably
approximating the cost of borrowing such gain from the government. First
Jersey, 101 F.3d at 1476. Our cases suggest, and Contorinis acknowledges,
Appellant’s R. Br. at 22, that the amount on which a violator must pay
prejudgment interest usually tracks the amount that the party is ordered to
disgorge. Whether or not a party personally enjoyed the gains from the illegal
action does not alter this principle, see, e.g., Warde, 151 F.3d at 50 (prejudgment
interest awarded on entire amount of gain from violator’s wrongdoing, even
though he did not enjoy that amount directly), and courts have required tippers
who have been ordered to disgorge their tippees’ gains – the very context to
which we have analogized Contorinis’s conduct in our analysis supra – to pay
prejudgment interest on those gains. See, e.g., SEC v. Aragon Capital Mgmt.,
LLC, 672 F. Supp. 2d 421, 444‐45 (S.D.N.Y. 2009), rev’d on other grounds and
25 aff’d in relevant part, SEC v. Rosenthal, 650 F.3d 156, 157 n.1 (2d Cir. 2011); SEC
v. Tome, 638 F. Supp. 638, 639‐40 (S.D.N.Y. 1986). As we have discussed above, it
is within the district court’s equitable discretion to order Contorinis to disgorge
the Paragon Fund’s gains even though he did not personally enjoy them, and for
parallel reasons we detect no abuse of discretion by the district court in ordering
him to pay prejudgment interest on that amount.
III. Injunction against Future Violation of Securities Laws
Finally, Contorinis appeals from the district court’s decision to
permanently enjoin him from future violations of the securities laws. We review
a district court’s decision regarding imposition of such injunctive relief for abuse
of discretion. SEC v. Bausch & Lomb, Inc., 565 F.2d 8, 18 (2d Cir. 1977). Here, the
district court reviewed the standard by which injunctions are applied, assessed
Contorinis’s conduct – noting in particular that his offense consisted of multiple
profitable illegal trades made over the course of several weeks – and deemed that
an injunction was appropriate.6 We furthermore observe that Contorinis
6 District courts are more likely to deem injunctive relief inappropriate when sentencing relatively naive offenders whose illegal behavior does not suggest calculating and carefully premeditated fraud. See, e.g., SEC v. Yun, 148 F. Supp. 2d 1287, 1294 (M.D. Fla. 2001) (denying injunctive relief where defendant was wife of executive who tipped friend regarding possible stock price changes in husband’s
26 continues to deny having engaged in insider trading, Joint App. at 286,
suggesting a lack of remorse and supporting further measures to deter future
wrongdoing of a like type.7 We thus identify no abuse of discretion in the district
court’s decision.
CONCLUSION
Because the district court did not abuse its discretion in ordering
disgorgement, calculating the disgorgement amount, granting prejudgment
interest on the disgorgement amount, and imposing a permanent injunction
prohibiting Contorinis from future violations of the securities laws, the judgment
of the district court is hereby AFFIRMED.
company at a party). In contrast, Contorinis is an investment professional who engaged in a sophisticated scheme of insider trading with multiple episodes. 7 Contorinis argues that the district court’s statements at his criminal sentencing, Joint App. at 343‐44, that “I don’t think there is any chance that you are going to commit crimes in the future” and that his insider trading scheme was “relatively isolated,” suggest that the injunction imposed at his civil trial comprised an abuse of discretion. However, these statements must be read in the context of a criminal sentencing proceeding in which the court was considering possible grounds for leniency in sentencing, not the need to impose a civil injunction.
27 12‐1723‐CV SEC v. Contorinis
DENNY CHIN, Circuit Judge:
In this case, the district court ordered defendant‐appellant Joseph
Contorinis to ʺdisgorgeʺ $7.2 million in ʺprofits.ʺ The profits were not his,
however, and the monies were never in his possession or control. Instead they
were earned by the fund by which he was employed (the ʺFundʺ). The majority
nonetheless affirms. I respectfully dissent, for the district courtʹs order is, in my
view, inconsistent with both the nature and purpose of disgorgement as well as
our decision in the related criminal case, United States v. Contorinis, 692 F.3d 136
(2d Cir. 2012).
Disgorgement is an equitable remedy that requires ʺa defendant to
give up the amount by which he was unjustly enriched.ʺ SEC v. First Jersey Sec.,
Inc., 101 F.3d 1450, 1475 (2d Cir. 1996) (emphases added). Its primary purpose ʺis
to deprive violators of their ill‐gotten gains.ʺ Id. at 1474; accord SEC v. Fischbach
Corp., 133 F.3d 170, 175 (2d Cir. 1997) (ʺAs an exercise of its equity powers, the
court may order wrongdoers to disgorge their fraudulently obtained profits.ʺ).
The amount of disgorgement ʺis determined by the amount of profit realized by
the defendant.ʺ SEC v. AbsoluteFuture.com, 393 F.3d 94, 96 (2d Cir. 2004); accord
SEC v. Cavanagh, 445 F.3d 105, 116 (2d Cir. 2006) (ʺThe remedy consists of . . . the
amount of money acquired through wrongdoing.ʺ). Disgorgement thus should
have the effect of returning a defendant to his status quo prior to the
wrongdoing, SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987) (ʺThe paramount
purpose of enforcing the prohibition against insider trading by ordering
disgorgement is to make sure that wrongdoers will not profit from their
wrongdoing.ʺ), and a court may not order disgorgement above ʺthe amount of
money acquired through wrongdoing.ʺ Cavanagh, 445 F.3d at 117.
Here, the district court ordered Contorinis to pay an amount
substantially above what he acquired through his wrongdoing. The district court
ordered him to disgorge funds he never had and to pay back profits he never
received. Instead of returning Contorinis to his status quo prior to his
wrongdoing, the district courtʹs disgorgement order penalized him by requiring
him to pay an amount equal to the $7.2 million in profits earned by the Fund and
an additional $2.5 million in prejudgment interest.
Disgorgement, however, is not intended to be punitive; it is remedial
in nature. See Official Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC, 467
F.3d 73, 81 (2d Cir. 2006) (ʺʹDisgorgement merely requires the return of
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wrongfully obtained profits; it does not result in any actual economic
penalty . . . .ʹʺ) (quoting H.R. Rep. No. 101‐616 (1990)); accord Cavanagh, 445 F.3d
at 116, 117 n.25 (ʺBecause the [disgorgement] remedy is remedial rather than
punitive, the court may not order disgorgement above [the amount of money
acquired through the wrongdoing].ʺ); SEC v. Wyly, 860 F. Supp. 2d 275, 277
(S.D.N.Y. 2012) (ʺ[A]wards that exceed the defendantʹs gains are punitive and
beyond the courtʹs equitable powers.ʺ). As the district courtʹs order had the
effect of punishing Contorinis for his wrongdoing, it went beyond the
permissible scope of disgorgement. While Contorinis undeniably deserved to be
punished, disgorgement was not the proper mechanism to be used to impose
that punishment.
The district courtʹs disgorgement order is also inconsistent with our
decision in the related criminal case, United States v. Contorinis, 692 F.3d 136 (2d
Cir. 2012). There, we held that Contorinis could not be required to forfeit profits
that the Fund earned from his illegal use of inside information. Our holding
rested on the principle that a defendant can be ordered to forfeit only the
proceeds that he actually received or controlled. Because Contorinis never
received or controlled the proceeds sought by the government, we concluded
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that Contorinis could not be ordered to forfeit those proceeds. Id. at 147. Now,
in this civil proceeding involving the same defendant, the same investment fund,
and the same proceeds, the majority reaches the opposite result, holding that
Contorinis must ʺdisgorgeʺ the Fundʹs profits and forfeit millions of dollars that
he never received.
To be sure, as the majority discusses, there are differences between
criminal forfeiture and civil disgorgement. But conceptually they are largely the
same. We even used the terms together in Contorinis as we explained that:
ʺCriminal forfeiture focuses on the disgorgement by a defendant of his ʹill‐gotten
gains.ʹʺ 692 F.3d at 146 (emphasis added) (quoting United States v. Kalish, 626 F.3d
165, 170 (2d Cir. 2010)); see also United States v. Ursery, 518 U.S. 267, 284 (1996)
(forfeiture is ʺdesigned primarily to confiscate property used in violation of the
law, and to require disgorgement of the fruits of illegal conductʺ) (emphasis
added). Both forfeiture and disgorgement seek to force a defendant to give up ‐‐
that is, to forfeit or to disgorge ‐‐ what he has wrongfully gained. Thus, we held
that the district court had erred in ordering Contorinis ʺto forfeit funds that were
never possessed or controlled by himself or others acting in concert with him.ʺ
692 F.3d at 148; see id. at 147 (ʺ[E]xtending the scope of a forfeiture to include
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proceeds that have never been acquired either by a defendant or his joint actors
would be at odds with the broadly accepted principle that forfeiture is calculated
based on a defendantʹs gains.ʺ).
Contorinis is also instructive with respect to the majorityʹs reliance on
the tipper‐tippee cases that hold that ʺ[a] tippeeʹs gains are attributable to the
tipper, regardless whether benefit accrues to the tipper.ʺ SEC v. Warde, 151 F.3d
42, 49 (2d Cir. 1998). We acknowledged in Contorinis that ʺa court may order a
defendant to forfeit proceeds received by others who participated jointly in the
crime, provided the actions generating those proceeds were reasonably
foreseeable to the defendant.ʺ 692 F.3d at 147. We observed that ʺ[t]he extension
of forfeiture to proceeds received by actors in concert with a defendant may be
deemed to be based on the view that the proceeds of a crime jointly committed
are within the possessory rights of each concerted actor.ʺ Id. We concluded,
however, that ʺ[t]his view does not support an extension to a situation where the
proceeds go directly to an innocent third party and are never possessed by the
defendant.ʺ Id. This reasoning applies with equal force here.
In the tipper‐tippee situation, the tipper and tippee are concerted
actors, jointly engaging in fraudulent activity ‐‐ the tipper breaches a fiduciary
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duty by disclosing inside information; the tippee trades on that information,
knowing of the breach and without disclosing what he knows; and the tipper
obtains ʺa direct or indirect personal benefit from the disclosure, such as a
pecuniary gain or a reputational benefit that will translate into future earnings.ʺ
Dirks v. SEC, 463 U.S. 646, 663 (1983); see also, e.g., Warde, 151 F.3d at 47 (SEC
must establish that tippee ʺknew or should have known that [tipper] violated a
relationship of trust by relaying [the] informationʺ); SEC v. Hughes Capital Corp.,
124 F.3d 449, 455 (3d Cir. 1997) (ʺCourts have held that joint‐and‐several liability
is appropriate in securities cases when two or more individuals or entities
collaborate or have close relationships in engaging in the illegal conduct.ʺ); First
Jersey Sec., 101 F.3d at 1475 (holding that owner‐officer who collaborated in
unlawful conduct of firm may be held jointly and severally liable with firm for
disgorgement of unlawful gains received); SEC v. Monarch Fund, 608 F.2d 938,
942 (2d Cir. 1979) (distinguishing ʺtippee who knows or ought to know that he is
trading on inside informationʺ from ʺoutsider who has no reason to know he is
trading on the basis of such knowledgeʺ). A tipper can be held responsible for
the tippeeʹs profits because both joint actors are deemed to be in possession or
control of the proceeds of their concerted activity. Contorinis, 692 F.3d at 147.
-6-
We do not have a tipper‐tippee relationship here. Contorinis was
not a tipper. Nor is there any evidence that the Fund knew that Contorinis
breached any duty when he made his investment decisions. As we concluded in
the criminal case, the Fund did not act in concert with Contorinis in his criminal
venture, and he never possessed or controlled its profits. See 692 F.3d at 147 (ʺwe
hold that the district court erred in ordering [Contorinis] to forfeit funds that
were never possessed or controlled by himself or others acting in concert with
himʺ). Hence, the Fundʹs gains were not properly included in the disgorgement
calculation.
For all these reasons, I believe the district court abused its discretion
in ordering Contorinis to disgorge the profits the Fund accrued as a result of his
criminal activity. Accordingly, I would vacate and remand the judgment of the
district court for recalculation of the amounts of disgorgement and pre‐judgment
interest.1
1 As we noted in Contorinis, the district court could require Contorinis to disgorge monies he acquired as a result of his criminal conduct, including ʺsalaries, bonuses, dividends, or enhanced value of [his] equity in the Fund.ʺ 692 F.3d at 148 n.4. The Securities and Exchange Commission could also have sought disgorgement from the Fund on the theory that, even though the Fund engaged in no wrongdoing, it was the recipient of ʺill‐gotten fundsʺ to which it did not have a legitimate claim. See, e.g., SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1998). -7-