Wednesday, May 17, 2006
My mother always said that it wasn't what I did that got me in trouble, it was the fact that I lied about it. That was not entirely true, of course, but the lie can certainly turn a bad situation worse. That is especially applicable when the lie involves an SEC insider trading investigation and the initial story is that the information was overheard from two guys talking in a bar, a tale sure to pique the Enforcement Division's interest. Stephen Messina will plead guilty to violating Sec. 1001(criminal information here) for making a false statement during an SEC investigation of his purchase of call options in Electronic Boutiques right before the announcement of an acquisition of the company by Game Stop that triggered a 34% increase in the stock price, giving him a profit of over $300,000. It turns out that the information came from Messina's friend Robert Downs, an attorney at the time at Philadelphia law firm Klehr Harrison, which worked on the deal, although Downs was not involved in the representation.
Messina and Downs settled an SEC civil insider trading action, with Messina disgorging his profits, plus paying a 50% penalty, while Downs paid a penalty equal to Messina's profits (Litigation Release here). Down, who is no longer with the law firm, was not involved in the criminal prosecution, and it will be interesting to see if the Pennsylvania state bar pursues any disciplinary action against him if the SEC allegations are correct. As a general matter, disclosing client-related information to a third party to trade on it would violate the confidentiality rules and the fiduciary obligation of lawyers that prohibits use of client information for personal benefit, even if the client does not suffer any direct harm. A Philadelphia Inquirer story (here) discusses the case. (ph)