Attorneys And Law Firms Remain On SEC’s Radar For Insider Trading Cases
By: James W. Kraus
A series of recent high profile prosecutions of attorneys or persons affiliated with law firms for insider trading has highlighted the government’s concern about attorneys and law firm personnel misusing information shared by clients. Law firms, particularly those representing public companies, are entrusted on a regular basis with sensitive information regarding proposed mergers, acquisitions and tender offers. Protecting this information from threats inside the organization is a challenge just as critical as protecting it from outside threats.
Attorneys advising or representing highly placed executives or board members in public companies are also frequent recipients of potentially market-moving information. It is correspondingly critical that these individuals restrict their use of this information to those purposes necessary to serve their client and nothing more. When sensitive information regarding public companies is misused for personal gain, those using it can expect the government to come calling. On Monday, the most recent example of this peril came to light when the SEC charged five Florida residents, including two lawyers and an accountant, with insider trading in advance of the acquisition of Pharmasset, Inc. by Gilead Sciences, Inc.
The charges are set forth in a civil complaint filed in the U.S. District in Newark, New Jersey, alleging that attorneys Robert L. Spallina and Donald R. Tescher, as well as accountant Stephen G. Rosen, used information obtained from a mutual client to trade in advance of the sale of Pharmasset to Gilead. According to the complaint, during a meeting on November 8, 2011 regarding year-end personal tax and estate planning, the mutual client, who was a Pharmasset board member, discussed with his advisors the fact that the Pharmasset board was negotiating to sell the company at a significant premium. Three of those advisors, Spallina, Tescher and Rosen purportedly used that information and purchased Pharmasset securities. According to the complaint, Spallina also told a financial advisor, Thomas J. Palermo, and his neighbor Brian H. Markowitz about the negotiations involving Pharmasset. Both of those individuals also purchased Pharmasset securities.
After public announcement of Gilead’s acquisition of Pharmasset on November 21, 2011, the Pharmasset stock price rose by 84%. Each of the five defendants named in the case liquidated their holdings and collectively gained more than $234,000 in illegal profits.
In the complaint, the SEC highlighted the breach of the respective fiduciary duties owed to the mutual client by the two attorneys and the accountant through the misuse of the information obtained in their meeting. The SEC alleged that the misappropriation of this material non-public information demonstrated that each of them acted knowingly and/or recklessly in trading Pharmasset securities for their own profit.
The SEC also announced that each of the defendants has agreed to terms to settle the charges. As part of the settlement, which is subject to court approval, the five individuals have collectively agreed to pay approximately $489,000, which includes disgorgement of their gains, pre-judgment interest and civil penalties.