Insider Trading by Law Firm Lawyers: Just How Common Is It?

[WSJ_law_blog]

We encourage you all, LBers, to take a closer read of the main complaint filed Thursday by federal prosecutors in the Galleon insider-trading case. After all, two attorneys, including an associate at Ropes & Gray, were fingered by prosecutors today. (Here’s the LB post from earlier today.)

The document is a good read, partly because it burrows into the nitty-gritty of what allegedly happened. The details are juicy (and some sound ripped from The Wire). There’s talk of pre-paid cell phones and multiple Blackberrys; wiretaps and catchy nicknames. There’s also talk of quick wealth and fast profits, money that led to “new kitchens” and honeymoons (See paragraph 31c).

But it’s also an instructive read because it serves as a reminder of just how much insider information law-firm lawyers are privy to, especially at the large, elite law firms like Ropes & Gray, and especially in an M&A era like the one we saw from 2004-2007.

So our question is: Is such trading among law-firm lawyers more prevalent than one might think?

We called around for some insight from some folks who run big M&A deals — and got in touch with Dewey & LeBoeuf’s Mort Pierce, a well-known M&A lawyer.

What’s to keep us, we asked Pierce, from thinking that this doesn’t happen all the time? “It just doesn’t,” was Pierce’s quick response. “It’s really very rare.”

Pierce conceded that law firms could likely never entirely ensure that it doesn’t happen — and it probably does, from time to time. “You can never totally eradicate it,” he says. “Greed is part of human nature, and it’s going to rear its head occasionally.”

That said, Pierce gave several reasons for why he doesn’t think it’s that prevalent. For starters, he said, the types of people who lawyer big deals just aren’t the type looking to risk their careers for an easy payday. “It’s a self-selecting group,” he said. “Law firms are not filled with high-fliers or people looking to make a quick buck. Generally speaking, they’re all too aware that one false move could end one’s professional career.”

Secondly, Pierce said that the culture at law firms simply wasn’t (again, generally speaking) conducive to — or encouraging of — trading on non-public, material information. “You know the law,” he said. “You know the dos and don’ts. We don’t allow our lawyers to trade securities in their clients, for instance. We have training programs on this. It’s really an ingrained part of the culture.”

Finally, he added, the firm takes steps to keep sensitive information from passing in front of unwelcome eyes. Deals, before they’re made public, have code names. Client names are not mentioned in memoranda (”We’ll refer to them as ‘yellow’ and ‘blue,’ said Pierce). Nor are dollar figures. And clients will often remind lawyers specifically about the importance of secrecy.

“As a result,” added Pierce, “rarely do you just leave [sensitive] documents lying around.”

LBers, what do you think? Does Pierce have it right? Or is insider trading more prevalent than he might lead us to believe?

[annjd]

Frankly with all that a professional has to lose, I think it is not so common based on my experience.