Wednesday, October 28, 2009

Lawyer Insider Trading Scandal Ends in Tragedy

This story about lawyers leaking and profiting from material, confidentiality client information has been in the news for several months. Recent developments:
  • Dead in Reported Suicide, Attorney Faced SEC Complaint Over Leak of Law Firm Data. "The SEC complaint details how in the early days of the scheme, Grmovsek [an attorney with Sullivan & Cromwell, and later Dorsey & Whitney] would make 'wake-up calls' to Cornblum at 4 a.m. or 5 a.m. so he could get to Sullivan & Cromwell to search for information before other employees arrived."
  • His Canadian partner, "ceased practising law and engaged in the illegal insider trading scheme full-time" starting in 1997, according to the Ontario Securities Commission, and recently plead guilty to $9M insider trading scheme.
What this means for your firm
From a risk management perspective, firms have a responsibility to tightly control access to confidential insider information. And the risk can be more than the "PR hit" taken when violations are publicized -- In a speech on the topic, an SEC Commissioner noted that:
  • “Law firms can be found liable for insider trading by partners or employees under… Section 20(a) of the Exchange Act, which imposes liability on controlling persons.”
This means that firms can be held responsible for the actions of partners, attorneys and staff. Importantly he also argued that:
  • “…good faith may no longer be a defense for a law firm… an affirmative obligation on law firms [exists] to take appropriate action to prevent insider is conceivable that a law firm which routinely has access to material, non-public information could be found reckless for failing to adopt appropriate policies and procedures for insider trading.

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