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,

(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.”

. Rather, criminal forfeiture penalties are “usually based

on the defendant’s actual gain.”

. 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.,

, 175 (2d Cir. 1997); see also SEC v. Tome,

, 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,

(2d Cir. 2011), quoting SEC v.

Commonwealth Chem. Sec., Inc.,

(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,

,

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,

. 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.,

, 1474‐75 (2d Cir. 1996). Accordingly,

we review a disgorgement order for abuse of that discretion. SEC v. Posner,

(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.”

(2d Cir. 1998). That principle has deep roots in parallel civil

remedial structures. For example, in Elkind v. Ligget & Myers, Inc.,

(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.,

(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.,

, 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,

(in further legal proceedings, same defendant tipper required to “make restitution for the profits derived by his [non‐defendant] tippees”); Elkind,

(tipper corporation held liable for tippee traders’ gains, even where non‐party tippee traders’ culpability was never addressed). Similarly, in Warde,

, 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,

(articulating the principle and collecting cases); see also SEC v. Banner Fund Int’l,

(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.

.

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.”

. See also Tex. Gulf Sulphur,

(“[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,

, 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,

, 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.,

(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.,

(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.

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’ . . . .”

(6th Cir. 1985), quoting SEC v. Manor Nursing Ctrs., Inc.,

(2d Cir. 1972). See also SEC v. Sierra Brokerage Servs. Inc.,

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,

(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,

(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,

(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.”

.

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,

; Patel,

. 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.”

, quoting

United States v. Bajakajian,

(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,

(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,

; see also SEC v. Williams,

, 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,

, 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.,

, 1071‐72 (2d Cir. 1995), quoting Commercial

Union Assurance Co. v. Milken,

, 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,

(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.,

(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,

. 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,

(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,

, 444‐45 (S.D.N.Y. 2009), rev’d on other grounds and

25 aff’d in relevant part, SEC v. Rosenthal,

, 157 n.1 (2d Cir. 2011); SEC

v. Tome,

, 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.,

(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,

(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,

(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.,

(2d Cir. 1996) (emphases added). Its primary purpose ʺis

to deprive violators of their ill‐gotten gains.ʺ

; accord SEC v. Fischbach

Corp.,

, 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,

, 96 (2d Cir. 2004); accord

SEC v. Cavanagh,

, 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,

, 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,

(2d Cir. 2006) (ʺʹDisgorgement merely requires the return of

-2-

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,

(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,

(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

-3-

that Contorinis could not be ordered to forfeit those proceeds.

. 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

(emphasis added) (quoting United States v. Kalish,

(2d Cir. 2010)); see also United States v. Ursery,

(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

; see

(ʺ[E]xtending the scope of a forfeiture to include

-4-

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,

(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

. 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

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

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

-5-

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,

(1983); see also, e.g., Warde,

(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.,

(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.,

(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,

(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,

.

-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

(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

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,

, 136 (2d Cir. 1998). -7-