The insider-trading conviction of Joseph Contorinis, an ex-Jefferies Paragon Fund money manager, was upheld by an appeals court in a ruling that may aid prosecutors as they defend the appeal of Galleon Group LLC co-founder Raj Rajaratnam.
Contorinis, 48, was convicted in Manhattan federal court in 2010 and sentenced to six years in prison for his role in an insider-trading scheme that prosecutors said earned him more than $7 million. Jurors found that he traded on tips from Nicos Stephanou, who was an associate director of mergers and acquisitions at Zurich-based UBS AG.
The 2nd U.S. Court of Appeals in Manhattan said yesterday that a leaked tip may still be prosecuted as inside information despite rumors or press reports circulating about the event in the marketplace. The court rejected Contorinis’s claim that the judge’s instructions to jurors were flawed.
Jurors may find that “the insider tip alters the mix by confirming the rumor or reports,” a three-judge panel wrote in a 22-page opinion. “Material, nonpublic information is information that either is not publicly available or is sufficiently more detailed and/or reliable than public available information.”
Roberto Finzi, a lawyer for Contorinis, didn’t immediately return a voice-mail message left at his office seeking comment on the ruling.
While upholding the conviction, the court also said the trial judge erred in ordering Contorinis to forfeit $12.6 million in profits that he didn’t earn or receive himself. The court returned the case to the district judge for a new hearing on the forfeiture amount.
Still, the ruling may aid prosecutors as they defend insider-trading appeals by Rajaratnam, who is serving 11 years in prison, and others who worked on Wall Street. Part of Rajaratnam’s appeal attacks the judge’s instructions to the jury at his own trial in 2011.
Rajaratnam argues that the judge should have told jurors they needed to find that Rajaratnam traded “on the basis” of inside information, rather than telling them the tips need only be “a factor” in the decision to trade.
“It’s not directly affecting Raj’s case but it might give something that prosecutors want to point to,” Peter Henning, a professor at Wayne State University Law School in Detroit, said in a telephone interview. “If I was the government, I would cite it.” The court “just said materiality is a jury assessment.”
Samidh Guha, a lawyer for Rajaratnam, didn’t return a voice-mail message seeking comment on the ruling.
Former Galleon trader Zvi Goffer, who is serving 10 years for insider trading after being convicted last year, raised the same argument as Contorinis on his appeal. Goffer’s lawyer, Alexander Dudelson, said in an interview that yesterday’s opinion may render Goffer’s argument about materiality “moot.”
“We have several issues on appeal,” Dudelson said. “That was one.”
At the trial, Stephanou, who was the government’s star witness, testified that he was part of a UBS team advising Cerberus Capital Management LP in its bid to buy Albertsons Inc. in 2006.
Stephanou, who pleaded guilty and testified against Contorinis in exchange for leniency, said he passed inside tips to Contorinis and others about pending deals including the acquisition of Albertsons, then the second-biggest U.S. grocer. At the time, Contorinis’s hedge fund held more than $70 million in Albertsons stock.
In the portion of its ruling about forfeiture, the appeals court said a trial judge may order a defendant to surrender proceeds received by others, “provided the actions generating those proceeds were reasonably foreseeable to the defendant,” the appeals court said.
“This 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,” the court said.
U.S. District Judge Richard Sullivan, who presided over the trial, held Contorinis liable for profits made by others who traded on the tips. Contorinis argued he was an employee and small equity owner of his firm and shouldn’t forfeit profits he never received.
Sullivan erred when he ordered Contorinis “to forfeit funds that were never possessed or controlled by himself or others,” the appeals court said.
The opinion may aid the appeal of Matthew Kluger, a lawyer seeking a reduction of his 12-year sentence for insider trading, the longest in history. Kluger pleaded guilty to stealing information about corporate mergers from four law firms and passing it to a friend, who in turn gave it to stock trader Garrett Bauer.
The scheme netted $37 million over 17 years, with Bauer making nearly all of the profit and Kluger earning less than $1 million, according to U.S. prosecutors in New Jersey. At his sentencing in June, Kluger attorney Alan Zegas said his client had no idea Bauer made so much.
Zegas said in an interview he may cite the opinion when he argues Kluger’s case before another appeals court. Zegas said Kluger should be sentenced only for the profit that was “reasonably foreseeable” to him, not the amount that was hidden from him.
“The opinion cites law that I was arguing at the time of sentencing,” Zegas said.
Anthony Sabino, a law professor at the Tobin School of Business at St. John’s University in New York, said the ruling “could be the beginning of a new controversy on forfeiture.”
“If there is evidence that you know someone else is a recipient of illegal tips, then you could be perceived as liable,” Sabino said in a telephone interview. “But if there isn’t any evidence, a defense lawyer may argue he’s not responsible or liable for profits or losses made by others.”
The cases are U.S. v. Contorinis, 09-cr-01083, U.S. District Court, Southern District of New York (Manhattan), and U.S. v. Joseph Contorinis, 11-cr-3, 2nd U.S. Circuit Court of Appeals (Manhattan).