Do Law Firms Need Compliance Programs? Part 2

Earlier this month it was accounting fraud. This week it’s insider trading. Law firms seem to pose the same risks as any other firm.

Do as I say; Not as I do.

A clerk at a law firm trolled the document management system for information on mergers when the firm was representing one of the parties. The clerk passed the information onto an unnamed Middleman, who passed the information on to a stockbroker. Everyone made money. the behavior was repeated for a dozen other transactions involving the law firm.

The SEC put together a graphic to help understand the flow of money and information. The three went through some rather elaborate steps to hide their tracks. As you can see from the graphic, Metro, the law firm clerk, would meet the Middleman at coffee shops to pass along the information. The Middleman would meet with Eydelman, the stockbroker, at the clock at Grand Central station to pass along the information.

eydelman graphic

Initially it surprised me while reading the SEC’s complaint that Middleman was not identified and not charged. The description of the Middleman’s information exchanges including Metro pointing to data on a mobile device and Middleman making Eydelman eat the paper with the information on it. It seems clear that Middleman is cooperating with the SEC and federal prosecutors. In the criminal complaint, Middleman was wearing a wire and had begun cooperating with authorities.

The law firm was in charge of sensitive information about its clients. It sounds like the firm failed secure the information. Metro may have worked on some of the transactions, but should not have had access to key information like timing and pricing. He probably should not have had access to the parties names.

It sounds like the law firm failed to take reasonable steps to isolate information to those who need to know.

Until the charges were filed, the law firm did not know about the transgressions. Metro was fired the day the charges were brought. You also have to wonder how often the law firm employees were reminded of not engaging in insider trading.

The SEC has fired a warning shot and has stated that it is focused on law firms:

 “We are continuing to combat serial insider trading schemes, particularly by law firm employees and other professionals who are entrusted with extremely sensitive market-moving information.”

– Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit

Attorney Matthew Kluger was sentenced to 12 years in prison, the longest term ever imposed in an insider-trading case, for stealing corporate merger tips from four law firms over 17 years. Two Ropes & Gray LLP lawyers in New York went to prison for leaking tips to former Galleon Group LLC trader Zvi Goffer.