United States: Maintaining Client Confidences During The Holidays: Avoiding Accidental Tipping

Last Updated: January 2 2014
Article by Dixie L. Johnson

With holiday cheer in full swing, it is time once again to consider how to avoid putting family and friends in danger by inadequately protecting material, nonpublic information entrusted to us at work. Previous writings provided an overview of applicable law and examples of unfortunate accidental tipping situations in prior years ( When the SEC Alleges Tipping (August 2011), Topics to Avoid in Holiday Conversation (November 2011), and Wrong Kind of Holiday Present for Family and Friends (December 2012)). This year, unfortunately, the best lessons come from cases the U.S. Securities and Exchange Commission brought involving law firm lawyers, two partners and one associate.

Lawyers can be bad guys, of course. Occasionally, cases arise in which lawyers steal confidential information from clients in order to benefit themselves and their chosen tippees. Perhaps the more interesting cases, however, occur when lawyers do not intend to tip others, but the SEC nevertheless charges their family members and/or friends with illegal trading based on confidential information allegedly misappropriated from the lawyers.

Lawyers have an ethical obligation to maintain client confidences,2 and to our knowledge, none of the lawyers involved in the cases described below has been charged with breaching that ethical duty. Inherent in each situation, however, are SEC allegations that the lawyers told people close to them material, nonpublic client information. Some of these allegations are being challenged in litigation; others have been resolved in settlements entered into without anyone admitting (or denying) the allegations.

None of the lawyers involved in these cases has been charged with violating the law, either, although those close to the lawyers have faced federal charges. Even so, and although the alleged facts remain largely in dispute, each lawyer has endured a government investigation that necessarily involved the lawyer‟s law firm, client(s), and close friends or family members. The vindication a lawyer might feel when not being charged personally provides little comfort when loved ones are charged and the lawyer‟s life has been turned upside down by government investigations.

Here are some unfortunate recent examples of SEC enforcement cases involving accidental tipping by lawyers. May this short note serve as a brief reminder to take extra steps to safeguard client information and to talk about things other than client confidences when enjoying holiday time this season.

Confiding in an Investment Adviser. To obtain good investment advice, a client must provide important information to his or her investment adviser. That does not mean the client should tell the investment adviser everything, of course, even when the investment adviser has also become a good friend.

In September, the SEC alleged that, in his own home after a few glasses of wine at dinner, a law firm partner told his investment adviser material, nonpublic information about a planned acquisition by Pfizer Inc. of King Pharmaceuticals, Inc.3 The SEC did not sue the law firm partner, instead alleging that he was "intoxicated" and "blurted out" that "It would be nice to be King for a day." The SEC apparently credited the lawyer‟s explanation, including in its complaint against the investment adviser a statement that the lawyer had "intended to imply he was a big shot‟ who knew some kind of information‟ about King Pharmaceuticals."

The investment adviser allegedly engaged in aberrational trading on the next available trading day, buying over $500,000 in King shares for himself and 46 clients, including the lawyer. The SEC also alleges that the investment adviser tipped his best friend, who opened an options account and purchased King stock and call options, as well as purchasing King stock in his wife‟s IRA account. Citing thecircumstantial evidence of this allegedly unusual trading and numerous telephone calls, the SEC sued the investment adviser and his best friend for misappropriating information from the lawyer and trading in advance of the public announcement.

The SEC does not allege that the lawyer told his friend everything he knew – in fact, absent more context, it is difficult to conclude that the statement the SEC alleges the lawyer said while intoxicated was sufficient to constitute material, nonpublic information. Undoubtedly, that question will be one of many addressed in the litigation, which will keep the lawyer involved as a witness for quite some time.

Confiding in a Spouse. Another law firm partner was caught up in an insider trading investigation this year, this time when she allegedly told her husband that their weekend plans would change.4

The couple had planned to attend events during a "wine and dine" weekend planned by "Partner A," another partner in the wife‟s law firm. Partner A had designed the weekend to honor the general counsel of National Semiconductor Corporation, a client of the firm. The SEC alleges that, during a call Partner A placed to the general counsel a few days before the scheduled event, the general counsel informed Partner A that he was working on his company‟s imminent acquisition and "sought the law firm‟s advice in dealing with certain regulatory issues arising from the deal." The general counsel also told Partner A that, due to the acquisition, he would need to cancel the client weekend.

The SEC alleges that Partner A told the law firm partner "that National Semiconductor‟s general counsel had cancelled the client weekend because of the imminent acquisition," and that the partner shared this information with her husband in confidence. The husband allegedly purchased National Semiconductor shares over the next few days, right before Texas Instruments announced its acquisition of the company.

The SEC asserted that the husband made "more than $29,000" in illicit profits from these trades, and the husband settled the SEC‟s charges without admitting or denying its allegations by repaying that amount, plus interest, plus a one-time penalty. The couple nevertheless faced public allegations that the husband‟s trades were "based on inside information misappropriated from his wife in violation of duties of trust and confidence owed to her" and with the knowledge that she, "as a law firm partner, owed a duty of trust or confidence to her law firm and its clients." One can only imagine the strain on that marriage.

Confiding in a Friend. The day after Christmas last year, the SEC added a research analyst to a pending case against two brokers, asserting that the trio had traded on material, nonpublic information misappropriated from a fourth person, who was a law firm associate.5 The research analyst, a citizen of Australia who worked in New York City for a broker-dealer, allegedly fled to Australia after learning of the SEC‟s investigation and subsequently moved to Hong Kong.

According to the SEC, the law firm associate worked in the Mergers & Acquisitions Practice Group at a New York law firm. In December 2008, the law firm assigned this associate, a citizen of New Zealand who was resident in New York, to work on International Business Machines Corporation‟s (IBM‟s) acquisition of SPSS, Inc. The SEC alleges the associate and the research analyst were good friends and shared an apartment with one of the other charged brokers, who was also a lawyer. So far, this sounds like the associate was in on the scheme, but the SEC‟s allegations suggest otherwise. The SEC describes the associate as confiding in the research analyst, whom he considered to be his closest friend in New York. The associate allegedly was comfortable telling his friend confidential information about work "because he believed that [the research analyst] would maintain its secrecy." As the SEC describes it, the associate "sought moral support, reassurance, and advice when he privately told" the analyst about "his new assignment" working on IBM‟s acquisition of SPSS, Inc. The lawyer expected his friend "to maintain information in confidence and refrain from illegal trading or disclosing it to others."

Instead, according to the SEC, the research analyst purchased SPSS, Inc. securities and call options. The research analyst also allegedly tipped one of the brokers, who was also the analyst‟s roommate, who then allegedly tipped his friend and fellow retail broker. Numerous instant messages are quoted in the complaint, none involving the associate.

The research analyst observed the associate‟s work schedule "including, for example, the Associate‟s receipt of work-related calls late into the night, especially as the Announcement grew near." Then, a few days before the merger was announced, the research analyst confessed his trading to the associate, who "expressed outrage and demanded" that the research analyst sell all of his SPSS securities immediately. The research analyst did sell most of his securities, and his illegal trading resulted in ill-gotten gains of $7,600. It wasn‟t until months later that he confessed to the associate that others had traded as well. In all, over $1 million in ill-gotten gains allegedly resulted from the information the associate shared with his friend in confidence.

The SEC‟s litigation is pending. Meanwhile, the research analyst and the two brokers were indicted, the research analyst was arrested in Hong Kong and brought back to the United States, and the two brokers were arrested in the United States. The research analyst and one broker have pled guilty to some of the charges, while the other broker is headed for trial.6


What is the lesson from these sad stories that we can embrace through the holidays? In each of these instances, the SEC alleges that the law firm lawyer trusted someone with information relating to the law firm‟s client. While some may argue that the information sharing was really about trying to look like a big shot, or clarifying social calendars, or getting moral support from a friend during a career challenge, the SEC‟s interpretation was that material, nonpublic information changed hands. That is the heart of the reminder: maintain client confidences.

And Happy Holidays!


1 Ms. Johnson co-heads the Securities Enforcement and Regulation practice at Fried, Frank, Harris, Shriver & Jacobson LLP in Washington, D.C. She also chairs the American Bar Association‟s Business Law Section. Ms. Johnson is grateful for the contributions of her colleague, Matthew Hanson, in the research phase of this article.

2 Rule 1.6 of the Model Rules of Professional Conduct states:

(a) A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).

(b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:

(1) to prevent reasonably certain death or substantial bodily harm;

(2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used or is using the lawyer‟s services;

(3) to prevent, mitigate or rectify substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client‟s commission of a crime or fraud in furtherance of which the client has used the lawyer‟s services;

(4) to secure legal advice about the lawyer‟s compliance with these Rules;

(5) to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, to establish a defense to a criminal charge or civil claim against the lawyer based upon conduct in which the client was involved, or to respond to allegations in any proceeding concerning the lawyer‟s representation of the client;

(6) to comply with other law or a court order; or

(7) to detect and resolve conflicts of interest arising from the lawyer‟s change of employment or from changes in the composition or ownership of a firm, but only if the revealed information would not compromise the attorney-client privilege or otherwise prejudice the client.

(c) A lawyer shall make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.

3 SEC v. Tibor Klein et al, Civil Action No. 9:13-cv-80954, (S. D. Fla., Sept. 20, 2013). See also SEC Litigation Release No. 22803 (Sept. 20, 2013) (CORRECTED) (the corrected version removed a quote from the Director of the SEC‟s Miami Regional Office).

4 SEC v. James Balchan, Civil Action No. 4:13-cv-00298 (S. D. Tex., filed Feb. 6, 2013).

5 SEC Litigation Release No. 22581 (Dec. 26, 2012), regarding SEC v. Thomas C. Conradt, et al., Civil Action No. 12-CV-08676 (Nov. 29, 2012 S.D.N.Y.).

6 See generally Indictment, United States of America v. Thomas C. Conradt and David J. Weishaus, 12 CRIM 887 (S.D.N.Y.), and Indictment, United States of America v. Trent Martin, S1 12 Cr. 887 (S.D.N.Y.).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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