Insider Trading is Bad Enough; Lying to the SEC About It Is Worse

In the latest insider-trading bust, the SEC settled a case with a North Carolina lawyer who was accused of trading on inside information concerning a client of his law firm. The lawyer allegedly netted a whopping $4,272 in profits, which he disgorged as part of the settlement (and in addition he paid an identical amount as a civil penalty). It appears he also got fired.

Mike O’Sullivan notes, in his Corporate Law Blog, that the North Carolina lawyer “has already lost his job at the law firm. It’s unlikely he will ever earn a dime with his J.D. ever again — even if he isn’t disbarred, who’d hire him? . . . [H]ow long will it take him to earn back the trust and respect he frittered away?” Bruce Carton points out, in his Securities Litigation Watch blog, that the case is “a reminder that there really is no de minimis exception for persons who would engage in insider trading–if the SEC thinks they have the goods on you, they’ll bring the case for deterrent value alone.”

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It could have been worse — as a Philadelphia lawyer found out a few years ago in a different insider-trading case.

In that case, the Philadelphia lawyer, via a client, learned some confidential information about an upcoming acquisition. He bought 500 shares of the target company, then sold it after the acquisition was announced.

Here’s where it got worse: SEC lawyers called up the lawyer and interviewed him about his stock trade. During the converesation, the lawyer “knowingly and willfully made a false statement when, asked about the reasons for his purchase, he failed to disclose that he had been informed of [the acquisition].”

So, not only did the SEC bring a civil case, it also referred the matter to the U.S. Attorney’s office. The lawyer pleaded guilty to a one-count criminal information alleging that he had made false statements to federal officials in violation of 18 U.S.C. § 1001 — which is a felony punishable by up to five years’ imprisonment.

This lawyer had been the head of the corporate department of a Philadelphia-based law firm. He also was on the board of directors of the client that had disclosed the confidential information to him. What was he thinking?

I wasn’t able to find out whether the lawyer went to prison. He did get suspended from practicing law for one year (he was later reinstated). I couldn’t find him in the Martindale-Hubbell on-line database of attorneys, which makes me wonder whether he’s still in practice.

LESSONS:

1. If you trade on inside information, the SEC won’t care how small your trade was or how little money you made.

2. If SEC investigators think you’ve lied to them, or withheld information from them, the range of possible bad things that could happen to you will expand dramatically.

3. Trading on inside information is a Bad Career Move. It likely won’t matter what a stellar performer you were before — as one of my Navy shipmates once said, “ten thousand attaboys can get wiped out in an instant by one aw-sh_t.”