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2nd Circuit gives SEC key ruling in insider trading cases

The 2nd Circuit ruled Contorinis is responsible for both his own gains as well as those of his company from insider trading

Chalk one up for the Securities and Exchange Commission (SEC): A key 2nd Circuit Court of Appeals ruling has given the SEC more leverage in insider trading cases.

On Feb. 18, the 2nd Circuit ruled that Joseph Contorinis, a former portfolio manager at Jefferies Group Inc., must forfeit $7.26 million following a 2010 conviction of insider trading. The sum includes both Contorinis’ profits on illegal trades and the gains made by his employer from the transactions.

As a result, the SEC can now use this case as precedent to charge that those convicted of insider trading not only be on the hook for personal gains, but also gains generated for their employers.

“It would make little sense to 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,” Judge Gerard Lynch wrote the for majority. The three-judge panel decided the case in a 2-1 vote.

According to The Wall Street Journal, this case may very well affect a number of cases currently travelling through the New York court system. Tamar Frankel, a professor at Boston University School of Law, told the WSJ that a number of defendants may be more willing to settle insider trading cases in fear of increased penalties.

“This is a punishment that hits the pocket,” Frankel said.

One key case that could be directly affected is that of Matthew Martoma, the ex-SAC fund manager found guilty of insider trading in early February. Previously, prosecutors and regulators had determined that Martoma had made a personal $9.3 million bonus off of the inside information SAC received. Now, however, a court could rule that Martoma is also on the hook for the $275 million in profits that SAC received as a result of the trades as well.


For what you need to know about the latest in insider trading, check out these InsideCounsel articles:

Former SEC enforcement co-director lands new litigation gig

Ex-SAC fund manager found guilty of insider trading

Could Berkshire Hathaway soon come under stricter governmental regulation?

Johnnie Cochran’s firm wants to represent whistleblowers

Assistant Editor

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Zach Warren

Zach Warren is Assistant Editor of InsideCounsel magazine, where he oversees online content submissions and administers InsideCounsel's enewsletters. Zach specializes in new media and multimedia...

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