Thursday, December 10, 2009
Well ... Galleon claims another lawyer scalp. The SEC and the US Attorney's Office in the Southern District of NY announced that Brien Santarlas, another former Ropes & Gray attorney has pleaded guilty to criminal insider trading charges. According to the USAO's criminal complaint:
From June 2007 through May 2008, SANTARLAS conspired with others to steal material, nonpublic information ("Inside Information") from the law firm of Ropes & Gray for the purpose of buying and selling securities. In violation of his duty of confidentiality to the law firm and its clients, as well as Ropes & Gray's written policies and procedures, SANTARLAS stole Inside Information about several mergers and acquisitions of public companies for which Ropes & Gray was providing legal services, prior to the public announcements of the deals. Specifically, SANTARLAS stole Inside Information about the acquisitions of 3ComCorporation and Axcan Pharma, Inc., and provided it to his co-conspirators in exchange for thousands of dollars in cash payments. As a result of trading that was based on the Inside Information provided by SANTARLAS and his co-conspirators, other individuals collectively made millions of dollars in illegal profits.
SANTARLAS, 33, of Hoboken, New Jersey, pleaded guilty today to one count of conspiracy to commit securities fraud and one substantive count of securities fraud. The conspiracy charge carries a maximum sentence of five years in prison and a maximum fine of the greater of $250,000, or twice the gross gain or gross loss from the offense. The securities fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million, or twice the gross gain or loss from the offense.
The SEC's complaint alleges that Santarlas together with Cutillo were part of the same insider trading network. The SEC alleges that Santarlas stole inside information regarding pending acquisitions by stealing it from Ropes' electronic network. For his trouble, Santarlas allegedly received $25,000. Geez, not even enough to pay off his loans from Franklin Pierce.
If you read the SEC's complaint closely, you'll see that the SEC connects Cutillo directly to the trading network by way of phone calls. Santarlas however is no where to be seen in the wiretaps. One wonders how the FBI was able to tie Santarlas to the ring? I have a guess. When you look at a document on Ropes' document server, I guarantee you that a record is kept of who you are and whether you edited the document or simply viewed it. It wouldn't be all that hard, if someone was looking at documents on the server to go in ex post and figure who it was. Notwithstanding the fact that these guys were tech-types, turns out they weren't all that tech savvy.
Turns out that's not the only way they got their information, according to Bloomberg, they they also eavesdropped on others’ conversations, and questioned unwitting lawyers at the firm to learn details of impending deals:
- "Whatcha working on?"
- "Oh, not much. We're selling 3Com to a PE investor. Too bad insider trading rules prohibit me from trading on that info."
- "Yeah, too bad."
One important lesson for Ropes I think is that they need to seriously reconsider their training programs.
Both Cutillo and Santarlas (courtesy of the Way- Back-Machine) were litigation associates in Ropes' IP group. I wonder whether litigation associates at Ropes are given adequate training with respect to their obligations under the insider trading laws? I suspect that corporate and transactional associates have it pretty well drilled into them, but are the litigation associates sent to depo training instead of the insider trading sessions? If so, that's turning out to be a really poor decision. If everyone in the firms has access to confidential inside information at the tap of a few keys, then everyone ought to be trained the same with respect to how one treats that information. Just saying.