Disgorgement remedy potentially broadened by Second Circuit

In a sharply-divided 2-1 vote, the Second Circuit Court of Appeals found that a civil disgorgement amount can exceed the profit that the defendant received. Although the case facts and Opinion directly involved insider trading in an action brought by the Securities and Exchange Commission, the rationale could presumably be applied in other wrongful conduct.

In SEC v. Contorinis, (Case 12‐1723‐cv, February 18, 2014), the Second Circuit upheld a trial court decision that Joseph Contorinis, the former managing director of an investment fund, disgorge over $7 million in unlawful gains from insider trading profits that the investment fund obtained. It was undisputed that Mr. Contorinis received little of the benefit from these profits. The Second Circuit rejected Contorinis’s argument that disgorgement is limited to his personal, as opposed to institutional, profit.

The Second Circuit Opinion included the following explanation:

“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.

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. …

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 [the party actually receiving the] 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).”

This rationale could potentially be applied to any disgorgement case. If this were to occur, the remedy of disgorgement would change dramatically.  Additional detail regarding this disgorgement decision is available in this related article.


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