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finding a defendant who had investment control over a fund and relied on nonpublic material inside information to make opportune trades with fund's assets guilty of criminal securities fraud.
Summary of this case from Kinra v. Chi. Bridge & Iron Co.Opinion
No. 09 Civ. 1043 (RJS)
02-03-2012
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. JOSEPH CONTORINIS, Defendant.
Plaintiff is represented by Kingdon Kase, Tami Scarola Stark, Catherine Eleni Pappas, and G. Jeffrey Boujoukos of the United States Securities and Exchange Commission, 701 Market Street, Suite 2000, Philadelphia, PA 19106. Defendant is represented by Mark Floyd Pomerantz, Roberto Finzi, and Farrah Robyn Berse of Paul, Weiss, Rifkind, Wharton & Garrison LLP, 1285 Avenue of the Americas, New York, NY 10019.
MEMORANDUM AND ORDER :
Plaintiff Securities and Exchange Commission ("SEC") brings this action against Defendant Joseph Contorinis arising out of his alleged involvement in an insider trading scheme that generated more than $12 million in illegal profits and avoided losses, in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder. Plaintiff seeks injunctive relief, disgorgement of Defendant's gains, and imposition of a civil penalty. Before the Court is Plaintiff's motion for summary judgment. For the reasons that follow, Plaintiff's motion is granted.
I. BACKGROUND
A. Facts
The following facts are taken from the pleadings, the parties' Local Rule 56.1 Statements, the affidavits submitted in connection with the instant motions, and the exhibits attached thereto. The facts are undisputed unless otherwise noted. Where only one party's 56.1 Statement is cited, the other party does not dispute the fact asserted, has offered no admissible evidence to refute that fact, or merely objects to inferences drawn from that fact.
This action arises out of a series of trades in December 2005 and January 2006 made by a hedge fund, the Jefferies Paragon Fund ("Paragon Fund" or the "Fund"), in the stock of Albertsons, Inc. ("ABS"), a supermarket retailer that was the target of several acquisition attempts. (Pl.'s 56.1 ¶ 8.) Due to well-timed trades, the Paragon Fund realized profits of $7,260,604 and avoided losses of $5,345,700. (Decl. of Kingdon Kase, dated March 29, 2011, Doc. No. 146 ("Kase Decl."), Ex. 7 at 2.) Defendant was a co-Portfolio Manager of the Fund, and his compensation included a component that directly correlated with its profitability. (Pl.'s 56.1 ¶ 3).
Defendant partially disputes this assertion, arguing that the "profit calculation is not representative of the amount of money that the Fund made in connection with its trades in Albertsons." (Def.'s 56.1 ¶ 30.)
The parties dispute the amount of control that Defendant had over trading ABS stock. Plaintiff claims that Defendant "alone, directed, authorized, and caused trades in ABS stock on behalf of, or for the benefit of the Paragon Fund." (Pl.'s 56.1 ¶ 7.) Defendant asserts that he "did not act alone in directing, authorizing or causing trades in ABS stock on behalf of, or for the benefit of the Fund; Michael Handler, the co-Portfolio Manager, also directed, authorized, and caused trades in ABS stock." (Def.'s 56.1 ¶ 7.)
Nicos Achilleas Stephanou, a longtime friend of Defendant's, was employed at UBS Investment Bank ("UBS"), where he worked on mergers and acquisitions. (Id. ¶ 2.) Stephanou obtained knowledge of nonpublic information regarding efforts by the firm Cerberus, in consortium with several other companies, to acquire ABS. (Id.) This acquisition was publicly announced on January 23, 2006. (Id. ¶ 29.) Throughout this time period, Stephanou and Contorinis spoke on the phone dozens of times during which, the SEC asserts, Stephanou passed material nonpublic information regarding the acquisition to Defendant. (Id. ¶¶ 19-32).
On May 6, 2009, Stephanou pleaded guilty pursuant to a cooperation agreement with the government to six counts of conspiracy to commit securities fraud and one count of securities fraud in relation to tipping Defendant with privileged information regarding the ABS deal. (Kase Decl., Ex. 9.) In October 2010, Stephanou testified as a government witness at Defendant's parallel criminal trial held before this Court.
On October 6, 2010, the jury returned a verdict in which it found Defendant guilty of one count of conspiracy to commit securities fraud and seven counts of securities fraud. The substantive counts of which Defendant was convicted included three counts of selling more than 2.2 million shares of ABS stock on December 22, 2005 and four counts of purchasing more than 1.1 million shares on January 11, 2006. (Kase Decl., Ex. 4.) On December 20, 2010, the Court sentenced Defendant to six years imprisonment. Defendant was also ordered to forfeit $12,650,438 in illegal profits and avoided losses. (56.1 ¶ 5.) Defendant appealed his conviction and the forfeiture order on December 30, 2010. (Opp'n at 2.) The appeal is currently pending.
Defendant was found not guilty on two counts of securities fraud stemming from sales of about 430,000 shares of ABS stock on December 7, 2005. (Kase Decl., Ex. 4 at 11; Ex. 6 at 1.)
B. Procedural History
Plaintiff initiated this action on February 5, 2009, alleging violations of the federal securities laws against Defendant, Stephanou, and six other individuals. The matter was stayed pending resolution of the criminal action. On March 29, 2011, Plaintiff filed a motion for summary judgment against Defendant, asserting that Defendant is collaterally estopped from challenging facts established at his criminal trial. The motion was fully submitted as of May 20, 2011.
Plaintiff entered into consent judgments with Defendants Stephanou, George Paparrizos, and Michael Koulouroudis. (See Doc. Nos. 83-84, 153.) Plaintiff voluntarily dismissed its claims against the other three Defendants. (See Doc. Nos. 89, 123.)
II. STANDARD OF REVIEW
Pursuant to Rule 56(a) of the Federal Rules of Civil Procedure, summary judgment should be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The moving party bears the burden of proving that there is no genuine issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). Once the moving party has met its burden, the nonmoving party "must come forward with specific facts showing that there is a genuine issue for trial." Caldarola v. Calabrese, 298 F.3d 156, 160 (2d Cir. 2002) (internal citations and quotation marks omitted). In ruling on a motion for summary judgment, the court must resolve any ambiguity in favor of the nonmoving party. Amnesty Am. v. Town of W. Hartford, 361 F.3d 113, 122 (2d Cir. 2004). The court "is not to weigh the evidence but is instead required to view the evidence in the light most favorable to the party opposing summary judgment, to draw all reasonable inferences in favor of that party, and to eschew credibility assessments." Weyant v. Okst, 101 F.3d 845, 852 (2d Cir. 1996). As a result, summary judgment will not issue where "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248.
III. DISCUSSION
A. Collateral Estoppel
"Under the doctrine of collateral estoppel, 'when an issue of ultimate fact has once been determined by a valid and final judgment, that issue cannot again be litigated between the same parties in any future lawsuit.'" United States v. U.S. Currency in Amount of $119,984.00, More or Less, 304 F.3d 165, 172 (2d Cir. 2002) (quoting Schiro v. Farley, 510 U.S. 222, 232 (1994)) (finding that claimants failed to overcome presumption of collateral estoppel based upon prior criminal proceedings); accord State of New York v. Julius Nasso Concrete Corp., 202 F.3d 82, 96 (2d Cir. 2000) (holding that construction contractors were collaterally estopped from challenging liability in state's antitrust action based on prior criminal convictions under RICO). "In order for collateral estoppel to apply, the court must determine that '(1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and actually decided, (3) there was full and fair opportunity to litigate in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits.'" Julius Nasso Concrete Corp., 202 F.3d at 96 (quoting NLRB v. Thalbo Corp., 171 F. 3d 102, 109 (2d Cir. 1999)).
Courts in this district have consistently found that a defendant convicted of securities fraud in a criminal proceeding is collaterally estopped from relitigating the underlying facts in a subsequent civil proceeding. See SEC v. Shehyn, No. 04 Civ. 2003 (LAP), 2010 WL 3290977, at *3 (S.D.N.Y. Aug. 9, 2010) ("'It is well-settled that a criminal conviction, whether by a jury verdict or guilty plea, constitutes estoppel in favor of the United States in a subsequent civil proceeding as to those matters determined by judgment in the criminal case.'" (quoting United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978))); SEC v. McCaskey, No. 98 Civ. 6153 (SWK), 2001 WL 1029053, at *3 (S.D.N.Y. Sept. 6, 2001) (granting summary judgment for the SEC because the defendant "was convicted by guilty plea on [criminal] securities-fraud charges related to the same activities at issue here. All questions of fact material to and underlying [the defendant's] criminal conviction . . . bind [the defendant] in this subsequent civil action.").
In the instant case, Defendant "does not dispute that summary judgment as to liability can be entered against him based on the preclusive effect of the jury's verdict in the criminal case." (Opp'n at 1.) This is so despite the fact that Defendant's appeal of his criminal conviction remains pending. See Russell-Newman, Inc. v. The Robeworks, Inc., No. 00 Civ. 9797 (JFK), 2002 WL 1918325, at *1 n.1 (S.D.N.Y. Aug. 19, 2002) ("The law is clear that ordinarily the pendency of an appeal should not impact the collateral estoppel effect of an otherwise final and valid judgment.").
Plaintiff additionally argues that it is entitled to summary judgment against Defendant on grounds independent of collateral estoppel, including "Contorinis's own admissions, his preclusion from offering evidence in his defense, and the adverse inference that should be drawn against him." (Reply at 1.) The Court finds adjudication of such issues unnecessary at this time. As Defendant notes in his opposition papers, in the event that his conviction is vacated, he is free to move for relief from any civil judgment entered as a result of that conviction. (Opp'n at 3 n.5.)
Accordingly, Plaintiff's motion for summary judgment is granted as to liability.
B. Damages
Plaintiff seeks three forms of relief against Defendant: (i) a permanent injunction that would enjoin Defendant from violating section 10(b) of the Securities Act of 1934 and Rule 10b-5 promulgated thereunder; (ii) disgorgement of Defendant's gains along with pre-judgment interest; and (iii) the imposition of a civil penalty.
1. Injunctive Relief
The SEC has requested a final judgment "[p]ermanently retraining and enjoining . . . Contorinis from violating Section 10(b) of the Exchange Act, and Rule 10b-5, thereunder." (Compl. ¶ I at 34.) As the Second Circuit has noted, "[i]njuntive relief is expressly authorized by Congress to proscribe future violations of federal securities laws." SEC v. Cavanaugh, 155 F.3d 129, 135 (2d Cir. 1998). To determine whether a permanent injunction is warranted, courts consider the following factors:
Defendant mischaracterizes the relief requested in his opposition papers, arguing that "the Court should not permanently enjoin Mr. Contorinis from working in the securities industry." (Opp'n at 17). While the SEC may seek such a broad prohibition later, it "is not the relief sought by the Commission in this civil action," and the Court need not address its appropriateness here. (Reply at 8.)
the fact that defendant has been found liable for illegal conduct; the degree of scienter involved; whether the infraction is an "isolated occurrence;" whether defendant continues to maintain that his past conduct was blameless; and whether, because of his professional occupation, the defendant might be in a position where future violations could be anticipated.S.E.C. v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 100 (2d Cir. 1978).
Applying these factors to the instant case, the Court finds that a permanent injunction is warranted. Significantly, there can be no doubt that the jury found that Defendant acted knowingly in making illegal trades. (See Opp'n at 18.) Moreover, while Defendant's conviction arose out of trades in only one company, Defendant made multiple trades over the course of several weeks, and he profited substantially from his conduct. (Pl.'s 56.1 ¶¶ 19-32.) Finally, throughout this action, and in the parallel criminal action, Defendant has consistently maintained that his past conduct was blameless.
As a practical matter, one might question the benefit of enjoining conduct that is already prohibited by the federal securities laws. Nevertheless, in light of the fact that Defendant satisfies most of the factors identified above, and that defendants in other SEC enforcement actions have agreed to similar injunctions as a part of their consent judgments, the Court is persuaded that a permanent injunction is appropriate here. (See Doc. Nos. 83 (Paparrizos consent judgment), 84 (Stephanou consent judgment), 153 (Koulouroudis consent judgment); SEC v. Cutillo, et al, No. 09 Civ. 9208 (RJS), Doc. Nos. 48-50, 52-54.)
Accordingly, Plaintiff's request that the Court permanently enjoin Defendant from violating Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder is granted.
2. Disgorgement
Plaintiff also seeks disgorgement in the amount of $7,260,604, representing the total profits realized by the Fund in its ABS trades between December 30, 2005 and January 23, 2006, less $45,074 in commission costs. (Decl. of John Rymas, dated March 29, 2011, Doc. No. 145 ("Rymas Decl.") ¶¶ 23-24.) Plaintiff also seeks prejudgment interest at the "IRS underpayment rate." (Pl.'s Mem. at 22.)
In response to Plaintiff's request for prejudgment interest, Defendant argues only that he "did not have 'ill-gotten gains,' since he did not commit insider trading, and therefore no prejudgment interest is due." (Def.'s 56.1 ¶ 32.) As such, it appears that Defendant concedes that Plaintiff is entitled to prejudgment interest on whatever disgorgement amount that the Court orders. --------
"In the exercise of its equity powers, a district court may order the disgorgement of profits acquired through securities fraud." SEC v. Patel, 61 F.3d 137, 139 (2d Cir. 1995) (affirming lower court's disgorgement order in Section 10(b) case). "The district court has broad discretion not only in determining whether or not to order disgorgement but also in calculating the amount to be disgorged." SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474-75 (2d Cir. 1996). In this regard, the Second Circuit has held:
The primary purpose of disgorgement as a remedy for violation of the securities laws is to deprive violators of their ill-gotten gains, thereby effectuating the deterrence objectives of those laws. . . . The effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable. The deterrent effect of an SEC enforcement action would be greatly undermined if securities law violators were not required to disgorge illicit profits.Id. at 1474 (internal quotation marks omitted).
Defendant argues that disgorgement in this proceeding is not warranted, as, pursuant to a forfeiture order in the criminal proceeding, he has already been directed to surrender approximately $12.5 million. (See Kase Decl., Ex. 7.) However, Plaintiff has represented that "if Contorinis is unsuccessful in his appeal of his criminal conviction and is unable to obtain relief from the Forefeiture Order [entered in the criminal proceeding], any funds that he ultimately forfeits pursuant to that order should then be credited toward the disgorgement ordered against him in this matter." (Reply at 7.)
Defendant also argues that he should not be required to disgorge funds "that were never received or enjoyed by Mr. Contorinis," as he "only personally profited a small percentage" of the $7.26 million in illegal profits. (Opp'n at 7, 10.) In the criminal action, however, Defendant was convicted of engaging in insider trading that resulted in "profits of $7,304,738." (Kase Decl., Ex. 7 at 2.) Defendant was also found to be jointly and severally liable with Stephanou for $12,650,438. (Kase Decl., Ex. 5 at 6-7.) As discussed above, Defendant is collaterally estopped from relitigating the findings of the criminal court. See Grossman, 1997 WL 231167 at *3 (adopting a report and recommendation ordering disgorgement, in which the magistrate judge rejected the defendant's assertion that disgorgement was inappropriate because "he did not personally profit from the unlawful trading," since the defendant was "jointly and severally liable for the profits of [his] tippees." (internal citation omitted)). Further, Defendant's argument that he should not be required to disgorge the portion of illegal profits that were enjoyed by the Fund has been rejected by the Second Circuit. See SEC v. Warde, 151 F.3d 42, 49 (2d. Cir. 1998) ("The value of the rule in preventing misuse of insider information would be virtually nullified if those in possession of such information, although prohibited from trading in their own accounts, were free to use the inside information on trades to benefit their families, friends, and business associates.").
Finally, Defendant argues that before he "can be ordered to disgorge any profits, the Court should deduct his costs" above and beyond the $45,000 in trading commission fees already deducted from the total realized profits, including, most particularly, his "hedging costs." (Opp'n at 10.) However, Defendant makes no attempt whatsoever to define his hedging costs or even articulate the amount of such costs that he is seeking to have deducted. Instead, Defendant claims only that he is entitled to "upwards of 35% in hedging costs, generally." (Opp'n at 10-11.) In support of this claim, Defendant cites to a ten-page "trading blotter" with no explanation of how the Court is to ascertain or derive Defendant's hedging costs. (See Berse Decl., Ex. B.) But even if such costs were ascertainable, Defendant has put forward no authority for the proposition that these costs are properly exempt from disgorgement.
Accordingly, Plaintiff's request for disgorgement in the amount of $7,260,604 plus prejudgment interest is granted.
3. Civil Penalties
Finally, Plaintiff asks the Court to impose the maximum allowable civil penalty against Defendant, which amounts to treble damages, or $21,781,812.
Section 21A of the Exchange Act authorizes civil money penalties for insider trading, up to three times the profit gained or loss avoided of the illegal act. "Congress intended the penalty to serve as a deterrent mechanism because disgorgement alone 'merely restores a defendant to his original position without extracting a real penalty for his illegal behavior.'" SEC v. Sekhri, 2002 WL 31100823, at *18 (S.D.N.Y. July 22, 2002) (quoting H.R.Rep. No. 98-355, 98th Cong., 2d Sess., 7-9 (1984), reprinted in 1984 U.S.C.C.A.N. 2274, 2280-81).
In determining the appropriate civil penalty, courts look to "the defendant's culpability, the amount of profits gained, the repetitive nature of the unlawful act and the deterrent effect of a penalty given the defendant's net worth." Sekhri, 2002 WL 31100823, at *18. "Some courts have weighed other factors also such as whether the defendant is employed in the securities industry, see, e.g., S.E.C. v. Falbo, 14 F. Supp. 2d 508, 528-29 (S.D.N.Y. 1998); whether the defendant has a prior record of securities violations, see id. at 528-29; and other penalties that arise out of defendants' conduct." SEC v. Svoboda, 409 F. Supp. 2d 331, 347 (S.D.N.Y. 2006). Courts in this district "have not hesitated to impose penalties where the defendants executed multiple insider trades and their scheme evidenced a high degree of intent." Id. (citing cases).
Applying these factors to the instant case, the Court finds that a fine of $1,000,000 is appropriate to satisfy the objectives of the Exchange Act. As noted above, Defendant is fully culpable for his crimes, from which he profited substantially. The jury's verdict reflects that Defendant's trades in ABS occurred over a period of two months, revealing a high degree of intent and a willingness to repeatedly exploit misappropriated information. Accordingly, a fine of $1,000,000 is sufficiently substantial to promote the general and specific deterrence contemplated by the Exchange Act. Any civil penalty greater than that, however, would be unduly harsh in light of the severe criminal penalties that have already been imposed on Defendant.
IV. CONCLUSION
For the foregoing reasons, Plaintiff's motion for summary judgment is granted. IT IS HEREBY ORDERED that Defendant is permanently restrained and enjoined from violating, directly or indirectly, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, by using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of any security: (i) to employ any device, scheme, or artifice to defraud; (ii) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (iii) to engage in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person.
IT IS FURTHER ORDERED that Defendant shall disgorge his profits in the amount of $7,260,604 plus prejudgment interest to be calculated at the IRS underpayment rate.
IT IS FURTHER ORDERED that Defendant shall pay a civil penalty of $1,000,000. The Clerk of Court is respectfully directed to terminate the motion at Doc. No. 142 and to close this case. SO ORDERED. Dated: February 3, 2012
New York, New York
/s/_________
RICHARD J. SULLIVAN
United States District Judge
* * *
Plaintiff is represented by Kingdon Kase, Tami Scarola Stark, Catherine Eleni Pappas, and G. Jeffrey Boujoukos of the United States Securities and Exchange Commission, 701 Market Street, Suite 2000, Philadelphia, PA 19106.
Defendant is represented by Mark Floyd Pomerantz, Roberto Finzi, and Farrah Robyn Berse of Paul, Weiss, Rifkind, Wharton & Garrison LLP, 1285 Avenue of the Americas, New York, NY 10019.