Amy Walsh
Amy Walsh ()

A divided Second Circuit panel recently bolstered the Securities and Exchange Commission’s ability to extract potentially enormous sums from defendants in securities fraud cases. Specifically, the court decided in SEC v. Contorinis that a defendant in an insider trading case can be forced to disgorge not only the illicit profits he personally earned, but also the illegal profits earned by an innocent third party that the defendant did not control.1 One particularly interesting aspect of this decision is that a different Second Circuit panel in the parallel criminal case vacated the forfeiture order against the same defendant because the forfeiture amount went beyond what the defendant personally obtained from the illegal conduct.

The defendant in both cases, Joseph Contorinis, was a managing director at Jeffries & Company, Inc. and was the co-manager of Jeffries Paragon Fund (the fund). Contorinis had the ability to make investment decisions on behalf of the fund, but did not have any control over the disbursement of the money earned by it. The defendant committed insider trading by executing several trades on behalf of the fund based on material nonpublic information he received from a UBS banker about an acquisition of the supermarket chain Albertson’s Inc. These illegal trades caused the fund to earn $7.3 million in profits and to avoid $5.3 million in losses.

Based on these illegal trades, Contorinis was indicted for conspiracy to commit securities fraud and securities fraud. On the heels of the indictment, the SEC brought a civil action against Contorinis and sought, among other forms of relief, disgorgement in the amount of $7.26 million (profit less trading commission costs).

After being found guilty by a jury in the criminal case, Contorinis was sentenced to six years imprisonment and ordered to forfeit $12.65 million (the combined value of the fund’s profits and avoided losses). On appeal, the U.S. Court of Appeals for the Second Circuit vacated the forfeiture order because the law does not support criminal forfeiture of proceeds that “go directly to an innocent third party and are never possessed by the defendant.”2 Instead, criminal forfeiture “is calculated based on a defendant’s gains.”3 On remand, the district court reduced the forfeiture order to $427,875, which was the amount Contorinis personally received as compensation in connection with his illegal trades.

Civil Case

Following Contorinis’ conviction in the criminal case, the SEC moved for summary judgment in its civil case. The district court granted the SEC’s summary judgment motion and ordered Contorinis to pay $7.26 million (less any amount paid as criminal forfeiture) in addition to a civil penalty of $1 million.

Contorinis appealed, arguing in essence that (1) because he never controlled the $7.2 million profit that accrued to the fund, it would be inappropriate to order disgorgement of that amount from him; and (2) the district court’s disgorgement order was inconsistent with the Second Circuit’s decision in the related criminal case vacating the forfeiture order. The court disagreed, and in a 2-1 decision, affirmed the district court’s disgorgement order as being within the broad discretion afforded to district courts in determining whether to order disgorgement and in calculating the amount.

In reaching its decision, the majority framed the issue as “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 his friends, family, or clients.”4 Contorinis argued that a defendant can only disgorge what he has personally “swallowed”; the SEC argued that a defendant should disgorge both the profits he has personally received from the fraud, as well as the profits from the fraud that he bestowed on others.

To resolve these conflicting positions, the court looked to insider trading case law involving tippers and tippees. In those cases, the Second Circuit has held that “a tippee’s gains are attributable to the tipper, regardless of whether the benefit accrues to the tipper.”5 From this body of case law, the court concluded that an insider who, rather than passing the information along to a third party, decides to trade for the benefit of that third party, must disgorge the profits he gained on behalf of the third party. Noting that Contorinis had greater control over the fund’s illegal profits than a tipper does over a tippee, the court reasoned that it would be inconsistent not to allow the district court to impose liability equivalent to that of a tipper/tippee.

The court made it clear, however, that its decision does not mean “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 circumstances.”6 Moreover, the court further limited its holding by stating that a disgorgement order cannot exceed the total amount of gain from the illegal conduct. Regarding the apparent anomalous result in light of the circuit’s vacatur of the district court’s forfeiture order, the court explained that criminal forfeiture is punitive rather than remedial, and therefore, cannot be imposed on innocent owners. Conversely, disgorgement is a remedial measure designed to prevent unjust enrichment.

In a strong dissent, Judge Denny Chin maintained that the district court’s order was inconsistent with both the nature and purpose of disgorgement because the disgorgement “is an equitable remedy that requires a defendant to give up the amount by which he was unjustly enriched.”7 Because the district court ordered disgorgement of profits that did not belong to the defendant and were never in his possession or control, the order had the effect of punishing him for his wrongdoing, and therefore went beyond the permissible scope of disgorgement.

Chin—who was on the panel that struck down the criminal forfeiture—concluded that the majority’s decision regarding disgorgement was inconsistent with the prior panel’s decision on forfeiture in the related criminal case: “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 ‘disgorge’ the Fund’s profits and forfeit millions of dollars that he never received.”8 While acknowledging that forfeiture and disgorgement are different remedies, Chin maintained that they are conceptually the same in that they both seek to force a defendant to give up what he has wrongfully gained.

Chin also rejected the majority’s reliance on the tipper-tippee cases. In those cases, he maintained, the tipper and tippee are both culpable in jointly undertaken illegal activity, and therefore disgorgement for the full amount of profit from either is appropriate. Chin further pointed out that there was no tipper-tippee relationship between Contorinis and the fund. Contorinis was not a tipper, and there was no evidence that the fund knew Contorinis breached any duty when he made the illicit trades.

SEC Leverage

The Second Circuit’s decision is important in several ways. First, the court’s decision, while clear in its holding, creates some uncertainty about whether district court judges will order disgorgement in amounts that exceed what the defendant personally gained. Contorinis upholds a district court’s authority to order disgorgement beyond what the defendant personally gained “in appropriate circumstances,” but does not specify what those circumstances might be. Moreover, the district court’s opinion in Contorinis provides no reasoning as to why disgorgement beyond personal gain was appropriate in that particular case as opposed to any other.

The Second Circuit’s decision substantially broadens the SEC’s ability to obtain from the wrongdoer alone the full amount of money generated by illegal conduct. Notwithstanding Contorinis, the SEC typically sues so-called “relief defendants” to recover illicit profits that the wrongdoer either never received, or no longer possesses.9 Now, at least in the Second Circuit, the SEC does not need to sue relief defendants in order to obtain the full amount generated from the wrongdoing. This ability to collect all the illegal proceeds from the wrongdoer substantially increases the SEC’s leverage in its settlement negotiations in insider trading and other fraud cases.

Conversely, Contorinis may also affect the decision-making of defendants who traded on behalf of others as to whether to admit to securities fraud liability. Any defendant in settlement negotiations with the SEC must account for the risk that an admission of liability may result in the defendant being forced to pay substantial sums of money in disgorgement that he or she never received or controlled. Indeed, Contorinis personally profited from his insider trading in the amount of $427,875, but was ordered to pay in excess of $7 million in disgorgement.

While the Contorinis decision certainly solidifies a district court’s power to order disgorgement in amounts far exceeding what the wrongdoer received, it remains to be seen to what extent district court judges will exercise that authority, and under what circumstances.

Amy Walsh is a partner at Morvillo LLP, in the New York office, and was chief of the Business and Securities Fraud Section of the U.S. Attorney’s Office in the Eastern District of New York. Savannah Stevenson, an associate at Morvillo LLP, assisted in the preparation of this article.


1. SEC v. Contorinis, 2014 U.S. App. LEXIS 2927.

2. Contorinis, 692 F.3d at 147-48.

3. Id.

4. Contorinis, 2014 U.S. App. LEXIS 2927, *10.

5. Id. at *11 (quoting SEC v. Warde, 151 F.3d 42, 49 (2d Cir. 1998)).

6. Id. at *18 (emphasis in original).

7. Id. at *33 (emphasis in original).

8. Id. at *36.

9. See SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1998).