Posted On Wednesday, September 30, 2015
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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.
Posted On Tuesday, September 29, 2015
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It is not uncommon in the financial services industry, particularly in matters involving the departure of partners or brokers, for there to be accusations that the departing person has taken with them confidential information. Typically these disputes involve threats of or actual lawsuits and motions for injunctive relief, usually involving client lists and other proprietary data. A recent case in the Southern District of New York demonstrates, however, that when a broker accesses client information without permission, even within their own firm, they may also face criminal charges.
On September 21, 2015, a private wealth management advisor, Galen Marsh, entered a plea of guilty before U.S. District Judge Kevin Thomas Duffy in the Southern District of New York to a one-count information charging unauthorized access to a computer. In entering the plea, Marsh admitted that he gained access to confidential and private information of hundreds of thousands of his employer’s clients without authorization.
According to the government, Marsh was employed in the private wealth management division of a bank, initially as a customer service associate (CSA) and then as a financial advisor (FA), working as part of a group that provided financial and investment services to private wealth management clients of the bank. There were other similarly structured groups within the wealth management division who provided similar services to the bank’s other wealth management clients.
While Marsh, as an FA and a CSA, was authorized to access the client information of the clients in his group, he was not authorized to access information regarding clients in other groups providing services to other private wealth management clients of the bank. According to the plea entered by Marsh, from June 2011 through December 2014, Marsh used the bank’s computer systems to access confidential information about certain clients serviced by FAs and CSAs outside of his group. He obtained this information from outside of his group by using identification numbers of other bank branches, groups and FAs in the banks’ computer system. He conducted more than 6,000 unauthorized searches in the bank’s computer systems and obtained confidential client information, including names, addresses, telephone numbers, account numbers, fixed income investment information and account values of approximately 730,000 client accounts at the bank. He then uploaded the confidential client information from the bank to a personal server at his home in New Jersey.
According to the government, Marsh illegally accessed the confidential information in order to use it for his personal advantage as a private wealth management advisor at the bank. The government added that from October 2013 through December 2014, Marsh was engaged in discussions regarding potential employment with two other financial institutions that are competitors of Marsh’s then employer.
The maximum penalty for unauthorized access to a computer under 18 U.S.C. § 1030, in cases where the person accesses the computer of a financial institution for purposes of commercial advantage or private financial gain, is five years in prison and three years of supervised release. Marsh is scheduled to be sentenced by Judge Duffy on December 7, 2015.
