SEC Backs Off $10 Million Penalty for Broke Money Manager

  • Agency made example of Joseph Contorinis in appeals court Win
  • U.S. judge asked by SEC to reset penalty to $3.9 million

U.S. regulators said after persuading an appeals court to uphold a $10 million judgment against an ex-Jefferies Paragon Fund money manager convicted of insider trading that there’s no point trying to collect all that money because he’s broke.

Instead, the Securities and Exchange Commission recommended to a Manhattan federal judge Monday that the agency reduce its “collection risk and costs” by requiring Joseph Contorinis to pay only $3.9 million on top of the $428,000 he was already ordered to forfeit in his criminal case.

The U.S. Court of Appeals in New York last year upheld a lower court’s finding that Contorinis was on the hook for $7.2 million he made for the fund and an additional $2.5 million in interest, giving the SEC power to collect illegal proceeds from money managers who engage in insider trading even when their firms got all the profit.

As part of the SEC’s settlement with Contorinis, he has agreed to drop an appeal to the U.S. Supreme Court, according to Monday’s court filing.

The SEC said financial information submitted by Contorinis shows he has an approximate net worth of negative $1.15 million, with $6.75 million in assets and $7.9 million in liabilities.

“There is substantial doubt that the commission could collect anywhere near the full amount of disgorgement, prejudgment interest, and civil penalty ordered by the final judgment,” the SEC said in its letter to U.S. District Judge Richard Sullivan. “Moreover, the commission would likely incur substantial legal and other costs in attempting to execute against Mr. Contorinis’ assets.”

The agency told the judge that even if the penalties against Contorinis are reduced, he’s still responsible for “a significant amount of other liabilities.”

Contorinis was sentenced in 2010 to six years in prison for his role in a scheme in which he traded on tips from an associate director of mergers and acquisitions at Zurich-based UBS AG.

In 2012, the appeals court threw out Sullivan’s order in Contorinis’ criminal case requiring him to forfeit $12.6 million in profits and losses avoided by the fund from his insider-trading activities, because the gains were “never possessed or controlled by himself.”

In the 2014 appeal of the SEC case, the appellate panel said that even though
Contorinis “did not pocket the profits from his trades, it was he who utilized
the inside information, executed the trades, and secured the resulting profit
for the benefit of his clients.”

The lower court case is SEC v. Stephanou, 09-cv-01043, U.S. District Court, Southern District of New York (Manhattan). The appeal was SEC v. Contorinis, 12-01723, U.S. Court of Appeals for the Second Circuit (Manhattan).

Before it's here, it's on the Bloomberg Terminal. LEARN MORE