(Bjoertvedt/ Wikimedia Commons)

The United States Appeals Court for the Second Circuit has ruled that a convicted insider trader found guilty of engaging in several illegal trades in 2005 must disgorge the windfall he reaped as a result of his misdeeds, but should not have to pay an amount equal to the losses he dodged.

Acting on nonpublic information obtained from a UBS employee, former Jeffries & Co. managing director Joseph Contorinis earned $7.2 million in profits for Jeffries Paragon Fund while avoiding $5.3 million in losses.

As Courthouse News Service’s Securities Law Review reports, Contorinis was found guilty of conspiracy and securities fraud and sentenced in 2010 to serve six years in prison and ordered to pay criminal forfeiture penalties totaling $12.5 million—a sum reflecting the combination of profits his scheme generated and losses it avoided.

On appeal, the Second Circuit upheld Contorinis’ criminal conviction in 2012, but vacated the forfeiture order because he himself did not accrue the benefit. Instead, the lower court recalculated that Contorinis should forfeit the $427,875 he earned in compensation tied to the illegal trades.

However, to resolve a subsequent SEC civil action against Contorinis that sought disgorgement of the $7.2 million in profits he obtained for the fund, Contorinis was ordered by U.S. District Court Judge Richard Sullivan to disgorge that amount, plus $2.4 million in interest that had accrued pre-judgment.

Contorinis appealed Sullivan’s ruling, arguing that as he never had control of the Paragon Fund’s profits, he should not be responsible for the disgorgement. U.S. District Court Judge Gerard Lynch disagreed. “The insider who, rather than passing the tip along to another, directly trades for that other’s account must equally disgorge the benefits he obtains for his favored beneficiary,” Lynch wrote.