Lawyers and Insider Trading

Even smart people do dumb things. Lawyers presumably know the law, but still break it. That means they occasionally take some short term profits through insider trading and get caught red-handed.

Everyone is focused on the Galleon Group insider trading trial happening in Manhattan, threatening to put Raj Rajaratnam in jail. That case is complicated and big, with wire taps and cooperating witnesses.

The SEC’s case against Todd Treadway seems more straight-forward.

Treadway was an attorney in the Executive Compensation, employee Benefits & Employment practice group at Dewy & LeBoeuf.

According to the SEC complaint, Treadway bought shares in Dewey’s client, Accredited Home Lenders, after reviewing a draft merger agreement for the company’s acquisition by Lone Star Funds in June 2007. He used his office computer to scoop up shares three days before the deal was announced publicly. Not being subtle, he used all of the available cash in the account to buy the stock.

According to the SEC complaint, once was not enough. Later, in May 2008, Treadway bought shares in CNET before the announcement that CBS Corp. planned to buy it. After reviewing various documents as part of his work on the transaction, Treadway bought CNET stock using four different brokerage accounts eight days before the deal was announced.

How did he get caught?

With any public M&A deal where there is a spike in trading activity before the deal is announced, the Financial Industry Regulatory Authority pokes around the accounts that traded in those shares to see if anyone trading was an insider. FINRA began looking into trading around the CBS/CNET deal. They asked Dewey to circulate to people in the firm who had knowledge of the deal a list of individuals and entities, one of whom was Treadway’s fiancée. Treadway responded to the questionnaire by replying “I have no knowledge of such person/entities.”

The complaint does not state that Treadway’s name was on the FINRA list. That seems odd. Maybe that part was left off the complaint and the SEC just wanted to point out that he lied about his fiancee.

Dewey’s enforcement was quicker than the SEC’s enforcement. The law firm fired Treadway in November 2008.

All this for only $27,000 in trading profits. Treadway made only $388 from the Accredit Home/Lone Star merger. That’s small dollars for a lawyer who presumably was making at $160,000 as an associate in a big new York City law firm. I suppose loading up on options would not have been subtle enough for Treadway.

Treadway is merely the latest attorney at a big law firm who has been caught taking a quick buck through insider trading. Two lawyers at Ropes & Gray, Arthur Cutillo and Brien Santarlas, pleaded guilty in 2009 for passing along tips about deals the firm was working on in exchange for kickbacks. Melissa Mahler, a lawyer at Nixon Peabody pleaded guilty in 2010 to making trades on a deal underway at the firm.