United States v. Contorinis
2012 U.S. App. LEXIS 17376, 2012 WL 3538270, 692 F.3d 136 (2012)
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Rule of Law:
In a criminal insider trading case, a forfeiture order is an in personam penalty limited to the proceeds personally acquired by the defendant or his co-conspirators. A defendant cannot be ordered to forfeit profits acquired by an innocent third party, such as his employer, which the defendant never personally possessed or controlled.
Facts:
- Joseph Contorinis was a co-portfolio manager for the Jeffries Paragon Fund ('Fund'), where he made investment decisions.
- Contorinis befriended Nicos Stephanou, an investment banker at UBS.
- Stephanou was assigned to a UBS team representing a potential purchaser of Albertsons grocery store chain (ABS).
- From September 2005 to January 2006, Stephanou regularly provided Contorinis with confidential, nonpublic information about the fluctuating status of the potential ABS acquisition.
- Based on Stephanou's tips, Contorinis executed a series of large trades of ABS stock on behalf of the Fund.
- Stephanou also provided the same inside information to several other individuals, or 'tippees,' who were not connected to Contorinis.
- The Fund's trading in ABS stock, directed by Contorinis, resulted in millions of dollars in profits and avoided losses for the Fund.
- Contorinis, as an employee, did not personally receive or control these trading profits, which were acquired by the Fund.
Procedural Posture:
- Joseph Contorinis was tried by a jury in the U.S. District Court for the Southern District of New York (trial court).
- The jury found Contorinis guilty of conspiracy to commit securities fraud and insider trading.
- The district court sentenced Contorinis to 72 months' imprisonment and entered a forfeiture order against him for $12.65 million, representing the profits gained and losses avoided by the Fund.
- Contorinis (appellant) appealed his conviction and the forfeiture order to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Does a criminal forfeiture order for insider trading extend to profits acquired by the defendant's employer, which the defendant never personally possessed or controlled?
Opinions:
Majority - Winter, Circuit Judge
No. A defendant in a criminal insider trading case cannot be ordered to forfeit proceeds that were never acquired by him or someone acting in concert with him, but were instead acquired by an innocent third party, such as his employer. The court distinguished between civil forfeiture, which is an in rem action against property, and criminal forfeiture, which is an in personam punishment against the defendant. Criminal forfeiture's purpose is to disgorge a defendant's 'ill-gotten gains,' and its calculation is based on the defendant's actual gain, not the gain of an innocent third party. While forfeiture may extend to proceeds received by co-conspirators for their reasonably foreseeable acts, it cannot be extended to proceeds that were never possessed or controlled by the defendant or his confederates. Because the profits from the illegal trades were acquired directly by the Fund, an entity over which Contorinis lacked control of disbursements, he cannot be ordered to forfeit those funds.
Analysis:
This decision establishes a critical limitation on the scope of criminal forfeiture in white-collar crime, particularly insider trading. By distinguishing between an employee's personal gain and their employer's profits, the court reinforces the principle that criminal penalties are personal to the defendant. This prevents the government from imposing forfeiture orders that are disproportionately large compared to the defendant's actual enrichment. The ruling forces a more precise calculation of 'proceeds' in cases where an individual's illegal acts benefit a third-party entity, requiring prosecutors to trace funds to the defendant's actual or constructive possession rather than simply pointing to the total profit generated by the scheme.
