News
Law Practice
May 11, 1999
Stock Check
With the advent of companies like E*trade and Charles Schwab online, even an unsophisticated investor can buy and sell shares of the latest hotshot company without a broker. And with the Dow breaking 10,000 this year, investing in the stock market has become a lucrative way to supplement income and plan for retirement.
But many lawyers are precluded from buying and selling stocks, thanks to insider trading restrictions. Perhaps contrary to common knowledge, insider trading restrictions apply not just to employees of a given company with insider information, but also to employees - attorneys and staff - of any law firm representing that company.
"It's difficult to be an active trader given these policies," said Kenton King, head of Skadden, Arps, Slate, Meagher & Flom's corporate group in Palo Alto.
Insider information can include, for example, knowledge that two companies are about to merge or knowledge that a company is about to settle a major class action or to gain or lose a material contract. Because this nonpublic information could influence the value of a company's stock, anyone with insider knowledge can't trade that stock until the information becomes public.
Tipping - leaking stock tips to others based on insider information - is also prohibited. Therefore, trading by lawyers' family members is sometimes also restricted.
Doubters about these rigid rules can consult a 1997 U.S. Supreme Court decision, United States v. O'Hagan, 521 U.S. 642. In that case, the court held that an attorney who purchased stock in a target corporation based on insider information about its imminent purchase could be found guilty of securities fraud. The lawyer learned of the pending merger because his law firm represented the acquiring company.
Even though the liability is individual to the trader and not the law firm or company, most law firms have instituted strict procedures to prevent even the appearance of insider trading,
At Skadden Arps, for example, attorneys and staff must clear all stock trades - even transactions related to nonclients - through the firm's conflicts procedure, according to King. . If the attorney or staff person gets clearance to trade stock, that clearance is good for that day and that day only, King said. The same goes for family members who want to place trades.
As a result of this strict procedure, employees can get caught in a situation where they can't sell stock in a client or a company doing business with a client that might be necessary for them to make a down payment on a house, King said.
Skadden polices its insider trading rules by informing employees of their obligations upon hir ing. They must sign an acknowledgment of the rules and periodically watch videos about the issue, King said.
"It's very important to us that there not even be the appearance of impropriety," he added. Mutual funds, such as index or blue-chip funds, are a good alternative for law firm employees, he said.
Lack of knowledge about a pending transaction or settlement - or whatever would constitute insider information - is a complete defense to a charge of insider trading, according to William Freeman, head of Cooley Godward's securities litigation practice group. But, he said, no one wants to have to prove their innocence to the Securities and Exchange Commission.
"We have for a long time had a policy that prohibits all employees from trading stock in clients without clearance," said Freeman, who defends officers and directors in shareholder litigation and defends companies and individuals in SEC and stock exchange enforcement actions.
Fenwick & West in Palo Alto uses code names for transactions to limit internal knowledge of pending deals, according to Gordon Davidson, the firm's chair. After each merger, Davidson said, the firm receives a list from the relevant stock exchange of people who traded the companies' stock. The firm reviews the list to make sure that no lawyer or lawyer's relative is on it.
"This is not a joking matter," Davidson said. While a "normal civilian" might be subject to a civil action for insider trading violations, the U.S. attorney will "throw the book at lawyers," usually with a criminal action, he said.
At Fenwick, the firm's intranet lists the firm's public-company clients and prohibits stock trading in these companies to periods when the companies' officers can legally trade. "We voluntarily observe the company's trading window," he said. Anyone unsure about trading status is required to contact the partner in charge of the client, Davidson said.
Nancy Wojtas, a partner at Manatt, Phelps & Phillips in Los Angeles and a former SEC lawyer, said she simply does not buy or sell stocks. "You never know when the firm's going to get a new client," Wojtas said. "I buy mutual funds."
Manatt's practice, according to Wojtas, is for nonpublic transactions to be announced via internal memo. If someone already owns stock in a company involved in the transaction, they have to hold it until the deal becomes public, she added.
Although the firm tries to keep knowledge of major transactions fairly limited, its attorneys - even litigators completely uninvolved in transactions - must clear all trades with the firm's in-house general counsel, Wojtas said.
Trades are restricted until any nonpublic information the firm has becomes public and disseminated. Typically, Wojtas said, that's 24 hours after the news has been announced by the relevant companies. But even after a transaction is public, she added, "there are often other factors [about the deal] that remain confidential" within the firm and which would restrict trading.
Whether attorneys and staff strictly abide by these various law firm restrictions is unclear. But it comes with the job, and other professionals - like accountants - have similar trading limitations.
Wojtas said she doesn't think employees mind the rules. "After all, no employee wants to be wrapped up in an SEC investigation," Wojtas said. "No one wants to be deposed by the SEC."
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Leslie Gordon
Daily Journal Staff Writer
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