Friday, October 30, 2009

News Flash: Federal Judge Blocks Red Flag Rules for Law Firms

In a surprise ruling, a federal judge in DC ruled in favor of the American Bar Association, agreeing that the FTC was wrong to extend Red Flag rules to law firms. The FTC can appeal the ruling, but it looks like flags down for the legal industry come Monday.

  • 11/03 Update: FTC further delays Red Flag rules until June 1, 2010. They're expected to appeal the ruling that these rules should not apply to law firms, so the issue is far from settled.

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 trading...it 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.

Sunday, October 25, 2009

Is Your Firm Ready for Red Flag?

Delayed several times, the FTC's Red Flag rules are set to take effect next week. These rules mandate that organizations, including law firms, implement programs that prevent and detect identify theft.

Earlier this year the ABA filed suit to bar the application of these rules to law firms. Congress introduced legislation recently (October 8) that would exempt legal organizations with fewer than 20 employees from the rule under certain circumstances. But unless the FTC reverses itself, or the courts step in, the rules are set to go into effect on November 1.

Several law firms have chartered internal teams to assess and respond to Red Flag rule requirements, developing plans for more stringent management of applicable confidential client informtaion and other procedures. This issue is far from settled. We're expecting more industry news as November approaches...

Wednesday, October 21, 2009

Trends in Firm Use of Confidentiality Management Technology

New industry statistics highlight the use of electronic confidentiality management tools by law firms. Several recent cases point to the important of establishing timely and effective ethical screens when taking on lateral hires with past conflicts.

A membership survey by the International Legal Technology Organization highlights the software choices firms have and have been making to achieve compliance and enforce controls in document and other electronic information repositories. A summary of law firm confidentiality and ethical screening software:
  • Wall Builder (IntApp) 70.3%
  • iMPrivate (DocAuto) 7.8%
  • WincWall (Wertheim Global Solutions) 7.8%
  • In-House, Custom-Built Tool 6.3%
  • The Wall (Younts Consulting) 3.1%
  • MasterEthics (RBRO Solutions) 1.6%
  • SecurityGuard (Olson Consulting) 1.6%
  • CompliGuard Protect (The Frayman Group) 1.6%