Big Law Insider Trading Might Be Less Irrational Than It Seems

When I first read about allegations of a massive insider-trading ring that involved lawyers who worked at multiple leading law firms, I was stunned. To put it bluntly: What the heck were they thinking?

According to the federal indictments in United States v. Nourafchan and United States v. Fejal, the 30-plus participants in the scheme included impressively pedigreed attorneys. They graduated from Columbia and Yale Law Schools, then went on to work at firms such as Latham & Watkins, Sidley Austin, and Wachtell Lipton.

Based on their careers up to this point, I’d guess that these lawyers are intelligent, hardworking, and capable of both self-control and long-term thinking. And given their credentials, they were well-positioned to enjoy long—and lucrative—legal careers.

So how could they allegedly engage in such short-sighted and ultimately self-destructive behavior? Why would they put their promising careers on the line—and risk going to prison—for what appear to be (relatively) modest paydays?

For now, we’re dealing only with allegations, and the defendants are presumed innocent. But to better understand why lawyers in Big Law might engage in insider trading, I reached out to some experts.

Todd Haugh, a professor of business law and ethics at Indiana University, and a former Big Law associate himself, discussed the “fraud triangle.” This theory identifies three factors driving the actions of fraudsters: incentive or pressure, often financial; opportunity, in terms of being in a position of trust with the ability to engage in wrongdoing; and rationalization, which Haugh described as “the story you tell yourself about why it’s okay to violate a trust.” In his view, the third element is the most interesting aspect of the triangle.

After offering the caveat that there’s still so much we don’t know, Haugh pointed out something noteworthy: None of the individuals involved in the alleged scheme were partners, despite having practiced for 10 or more years. This gives rise to several possible rationalizations, such as “I should be able to cut corners and get mine, because all these other guys have passed me by,” or “I’ve been screwed over, working so hard for so many years, and this is how I’m going to make it up.”

Rationalization can take other forms. In some white-collar cases, individuals take steps that aren’t illegal but come close to the line—or perhaps they do cross the line into illegality, but in a relatively minor way. If nothing happens and they don’t get caught, that can be used to rationalize more serious behavior, Haugh said.

He also highlighted the human element present in many white-collar cases. It can be easier to rationalize when you’re surrounded by other individuals who are engaged in the same conduct, making it seem less problematic, in an “everyone else is doing it” way.

“Sometimes there’s a sense in popular culture of the white-collar offender as a greedy lone wolf,” Haugh told me. “But in organizational settings, and especially in insider-trading schemes, that’s fairly rare. It’s more common for there to be involvement by multiple people.”

Haugh acknowledged that the duration of the alleged scheme, which went on for roughly 10 years, and its scope, involving multiple elite firms, are “shocking.” But he wasn’t surprised to see that it involved dozens of people, many of them with close ties to each other.

Eugene Soltes, a professor at Harvard Business School and the author of “Why They Do It: Inside the Mind of the White-Collar Criminal,” similarly emphasized the social aspects. Some of the lawyers involved in the scheme were longtime friends, dating back to college or law school, and they might have influenced each other’s thinking about the nature of their actions.

Soltes said he was struck by the alleged expansion of the scheme over time. As he learned when researching “Why They Do It,” misconduct often becomes easier when a small group develops its own norms, independent of the applicable laws and rules of professional conduct.

“Lawyers may know the law exceptionally well, but knowledge of the rule is not the same as living within a culture that reinforces it,” he said. “The key question is how alleged conduct that would look obviously impermissible from the outside came to feel acceptable, justified, or routine inside the group.”

The psychological and social factors identified by Haugh and Soltes helped me understand why Big Law attorneys might commit acts that struck me as incredibly irrational from a risk-reward, cost-benefit perspective. And the irrationality should be especially clear to lawyers—who are more aware than other professionals that insider trading is illegal, perpetrators almost always get caught, and the consequences of getting caught can be ruinous.

But another expert offered fascinating pushback: Judge Jed Rakoff. He has decades of experience with white-collar offenses and offenders, as a prosecutor, defense lawyer, and longtime judge on the US District Court for the Southern District of New York. (In our conversation, Rakoff emphasized that he was speaking in general terms and based on his past experience, without reference to any cases currently pending before him or any other judge.)

For starters, he disputed my premise that insider trading is frequently detected and prosecuted. Instead, he said, “There are a lot of indications in the scholarly literature that insider trading is a very widespread, not uncommon crime, and a relatively small percentage of those who commit it get caught.”

Even when insider trading is discovered, it can takes years to investigate and prosecute. According to Rakoff, this matters because criminological research suggests that when it comes to deterrence, how quickly offenders get caught might matter more than how often they get caught. And in his experience, most white-collar defendants don’t believe they’ll get caught anyway—“which isn’t wholly irrational, because I think only a small percentage do.”

In fact, smart lawyers might see themselves as clever enough to escape detection. In the Fejal indictment, authorities allege that the defendants took numerous steps to conceal their conduct, including communicating through burner phones and encrypted applications. By all appearances, they succeeded for years.

“We shouldn’t ignore the obvious greed factor,” Rakoff concluded. “There are all sorts of people out there who want to make a fast buck. Greed knows no favorites—and unfortunately rests deep in the human psyche.”

David Lat, a lawyer turned writer, publishes Original Jurisdiction. He founded Above the Law and Underneath Their Robes, and is author of the novel “Supreme Ambitions.”

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