The SEC and the DOJ broght charges against Walter C. Little and his neighbor Andrew M. Berke for illegal insider trading. This particular case caught my attention because Mr. Little was a law firm partner and he found the information by searching through his law firm’s document management system.
According to the complaints, Mr. Little obtained material, nonpublic, confidential information about seven issuers and 11 corporate announcements through his access rights on law firm’s internal computer network. However, Mr. Little did not work for those clients or on those transactions.
Mr. Little and Mr. Berke have not settle the claims. Mr. Little is going to have an uphill battle because the law firm disclosed the data about Mr. Little accessing the confidential documents.
In one case, the law firm was serving as legal counsel to Pentair on a possible merger with ERICO Global in a transaction that the firm called Project Lionel.
The damning timeline:
- On August 4, The document management system shows Mr. Little accessing documents titled “Pentair – Commitment Letter” and “Lionel Goldman Sachs Engagement Letter”.
- On August 5, Mr. Little and Mr. Berke exchange text messages and phone calls.
- On August 6, Mr. Berke starts buying call option on Pentair stock.
- On August 11, Mr. Litte accessing a document entitle “Project Lionel – Form 8-K(Execution of Merger Agreement)”
- On August 11 and over the next few days, Mr. Little buys Pentair call options.
- On August 17, Pentair issues a press statement announcing the merger.
A partner at a big law firm knows that accessing merger information about firm clients is wrong and trading on that information is illegal. The trading would be flagged as suspicious by the brokerage firm and sent the information to FINRA. If there was enough suspicious activity around the merger, FINRA would send a query to the law firms involved. The law firm would see the partner’s name and turn over all of the relevant information.
The only question I have is how well did Mr. Little disguise his trading. Since the trading happened over the course of a year with several different clients, I assume he did a good job of hiding the trading. I would guess that it was the last deal with Hanger, Inc. that caught the regulators attention. Once in their sights, the regulators were able to trace back to Mr. Little’s trading on other law firm clients.
Mr. Berke seems to have a more defensible position. The prosecutors will need to prove the information was passed to him and that the trading was not just a coincidence. Then, it’s into the post-Newman world of whether he needed to know the information was supposed to be confidential or whether the relationship between the two needed some level of significance.
Then there is the law firm leaving documents unprotected. This is common. It’s tough to balance the sharing needs of a sprawling team against the information security impositions in the document management system.
At a minimum it’s an embarrassment to the law firm. I would assume the law firm has changed its document security settings, defaulting to limited rights, instead of defaulting to a public setting. I’m sure there is plenty of complaining because it makes it hard to work collaboratively when document security gets in the way.