April 02, 2014 Articles

Blurred Lines: Disgorgement, Forfeiture, and Punishment

The Second Circuit has blurred the line between the equitable nature of disgorgement and the punitive nature of forfeiture.

By Jay Musoff, Nathan J. Muyskens, and Emily H. Stone

Until recently, criminal-forfeiture and civil-disgorgement actions had related goals. Generally, forfeiture sought to punish an offender by depriving him or her of ill-gotten gains, while disgorgement would restore the status quo by depriving violators the fruits of illegal conduct. In other words, although forfeiture’s aim and nature was punitive, and the equitable goal of disgorgement was to make breaking the law unprofitable, both sought to deprive the offender.

SEC v. Contorinis
The Second Circuit has significantly blurred this line in its recent panel opinion in SEC v. Contorinis, changing the landscape of who may be forced to disgorge profits realized from insider trading by blurring the equitable nature of disgorgement with the punitive nature of forfeiture. In 2010, Joseph Contorinis, a portfolio manager at Jeffries & Co., was convicted of insider trading based on tips he received from an investment banker. The trades resulted in $7.2 million in profits for the fund, while Contorinis received about $425,000 in compensation from those profits. The district court’s order that Contorinis forfeit the $7.2 million of the fund’s profits was overturned by the Second Circuit because Contorinis did not control the profits sought. While this analysis appeared to limit exposure of insider-trading defendants to amounts gained directly from the trading, a new opinion with respect to the Securities and Exchange Commission (SEC) civil suit filed against Contorinis for the same trading has changed the game. In that case, the District Court for the Southern District of New York ordered Contorinis to disgorge the $7.2 million in profits that the Second Circuit had held could not be forfeited. The Second Circuit panel affirmed. The opinion likened Contorinis’s case to that of a tipper who can be ordered to disgorge profits made by others on the basis of the tip. Accordingly, the court reasoned, requiring a defendant who trades on another’s account to pay disgorgement was consistent with that practice.

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