Preventing Insider Trading Violations in the Law Firm
| Publication year | 1991 |
| Pages | 887 |
1991, May, Pg. 887. Preventing Insider Trading Violations in the Law Firm
In a September 1990 address to the District of Columbia Bar Association's Litigation Section, Richard Breeden, the chairman of the Securities and Exchange Commission ("SEC"), expressed amazement at the number of insider trading cases where lawyers are charged. Chairman Breeden said that recent insider trading cases indicate there is a surprising number of law firms without formal procedures regulating securities trading by firm personnel and the use of client information. He also expressed doubts that law firms are taking the problem seriously.(fn1)
Under the Insider Trading and Securities Fraud Enforcement Act of 1988(fn2) ("1988 Act"), law firm members may be subject to SEC enforcement action if they are a "controlling person" and fail to administer policies and procedures designed to prevent the misuse of material nonpublic information. In addition to potential liability under the 1988 Act and other federal securities laws, lawyers face potential disciplinary action under state professional responsibility rules requiring lawyers to maintain the confidentiality of client information.(fn3)
This article covers briefly the current status of the law, then addresses various policies and procedures that a law firm should consider implementing to prevent insider trading violations and the misappropriation of confidential client information. The Appendix to this article is a sample policy statement that law firms may want to consider adopting.
The SEC has attempted to remind lawyers regularly of their obligations relating to clients' nonpublic information. In 1977 and again in 1980, the SEC issued releases addressing a law firm's duty to maintain the confidentiality of client information and encouraging firms to adopt policies and procedures to prevent the misuse of such information.(fn4) The Insider Trading Sanctions Act of 1984 ("ITSA") significantly increased criminal and civil penalties under the federal securities laws for insider trading.(fn5) The 1988 Act expanded application of the penalties established in ITSA to control persons who (1) knew or recklessly disregarded that a person under their control was likely to engage in trading on material nonpublic information and (2) failed to take steps to prevent such trading before it occurred.(fn6)
In the absence of a statutory definition of "control person," the courts consistently have found that a control person includes not only employers but any person with the power to influence or control the direction, management, policies or activities of another person.(fn7) Consequently, under the 1988 Act, senior members of law firms who serve as control persons may be prosecuted under the insider trading laws for failing to take steps to prevent tipping or trading on material nonpublic information by the partners, associates, paralegals or staff of their firm. The SEC may seek civil penalties from control persons of $1 million or three times the profits realized or losses avoided, whichever is greater.(fn8)
In addition to potential liability under the federal securities laws, lawyers who trade or tip on client information face potential disciplinary action under the Colorado Code of Professional Responsibility ("Code"). Disciplinary Rule 4-101 of the Code prohibits a lawyer from knowingly (1) revealing a confidence or secret of a client; (2) using a confidence or secret of a client to the disadvantage of the client; or (3) using a confidence or secret of a client for the lawyer's or a third person's advantage, unless the client consents after full disclosure.(fn9) In addition, a lawyer has a duty to exercise reasonable care to prevent his or her employees, associates and others whose services the lawyer uses from disclosing or using the confidences or secrets of the lawyer's clients.(fn10)
It is imperative that law firms consider implementing policies and procedures to prevent their personnel from trading on material nonpublic information. By adopting such policies and procedures, law firms can avoid potentially negative publicity, professional...
To continue reading
Request your trial