M&A Insider Trading Allegations Threaten Big Law Reputations (3)

Elite M&A lawyers accused of aiding a massive insider-trading ring show how Big Law firms risk reputational harm when their talent is accused of serious crimes.

Seven firms—Goodwin Procter; Latham & Watkins; Sidley Austin; Weil, Gotshal & Manges; Wachtell, Lipton, Rosen & Katz; Willkie Farr & Gallagher; and DLA Piper—have former employees involved in the scheme in which prosecutors allege lawyers from top mergers and acquisition firms provided tips on some of the biggest deals of the last decade to an insider trading ring.

The allegations “would certainly have reputational damage” for law firms, said Michael Frisch, an ethics counsel at Georgetown University Law Center. “A major player who is contemplating doing some kind of takeover might be reluctant to use a firm who had a track record of employees misusing the information.”

The two Justice Department indictments unsealed in federal court in Boston on Wednesday place a spotlight on law firms that cherish their reputations as a way to compete for top clients. The indictments charged 30 people, including corporate attorneys and financial-sector employees, with providing tips that resulted in tens of millions of dollars in illegal profits.

Although the indictments refer to the law firms as “victims,” the alleged facts may raise questions for current and future clients of the firms, said Susan Fortney, a professor and director of the program for advancement of legal ethics at Texas A&M School of Law.

Specifically, clients may have concerns related to the firms’ screening of lawyers and the adequacy of safeguards and controls regarding access to nonpublic confidential information available on the firm’s document management systems—and the monitoring of that access, she said.

“This especially may be a concern when lawyers on leave or those who are not working on securities matters can obtain access to material, nonpublic information relating to securities transactions,” Fortney said.

Former Employees

Prosecutors didn’t name the firms from which information was allegedly stolen, but the descriptions of the deals and biographical information of the defendants indicate they include some of Big Law’s most elite: Sidley, Latham, Goodwin, Wachtell, Weil, and DLA Piper.

According to DOJ prosecutors, Nicolo Nourafchan misappropriated confidential deal information from three different law firms he worked at between 2013 and 2023—Sidley, Latham and Goodwin. He allegedly conspired with a college classmate, Robert Yadgarov, to recruit other corporate lawyers to provide tips and paid them kickbacks from successful insider trades.

Deal information and Nourafchan’s biographical details point to Sidley Austin as the first firm of the three where he worked and misappropriated deal secrets for financial gain. During his tenure at Sidley, Nourafchan allegedly misappropriated details about deals involving the firm’s clients IPC Healthcare and GIC, a Singaporean wealth fund. The firm did not respond to a request for comment.

Latham, the next law firm Nourafchan worked for, said in a statement, “The former associate charged today has not been associated with our firm for five years, and the conduct as alleged would reflect a serious violation of our robust policies and procedures.” The firm didn’t name the former employee.

Goodwin Procter said it was “deeply disappointed that a former employee is alleged to have violated the trust placed in him and misused confidential information as part of a broader criminal scheme affecting multiple law firms and their clients.” The firm added that it’s been cooperating and will continue to “cooperate fully” with law enforcement. It also didn’t name the former employee.

One of the other defendants, Gabriel Gershowitz, is cooperating with the DOJ investigation, according to a case unsealed this week. Details in the newly unsealed allegations point to three law firms Gershowitz worked at and stole information from—Weil, DLA Piper, and Willkie.

A spokesperson from Weil said “the former employee” who misused confidential information as part of the insider trading scheme “has not been associated with the firm for over six years and the transaction involved dates back to 2019.” The firm said the government filings show “Weil was among the victims of the alleged scheme.” Weil said it views the allegations as “extremely serious” and has “cooperated fully” with the US Attorney’s Office.

Willkie is aware a former employee is alleged to have engaged in conduct that violates the firm’s “clear and well-defined compliance policies, which we take seriously and enforce across the firm,” a firm spokesperson said. “There are no allegations of wrongdoing against the firm, which has and will continue to cooperate fully with the investigation of this matter.”

DLA Piper didn’t immediately respond to a request for comment.

Wachtell also matches the description of one of the firms in the complaints that had non-public information conspirators allegedly used in their scheme to make trades. An unnamed person worked at Wachtell from 2013 to 2022.

A spokesperson from Wachtell said “the responsible party” left the firm more than four years ago. “There are no allegations of wrongdoing against the firm,” according to the statement, which added that the firm has “cooperated fully” with the US Attorney’s Office and will continue to do so.

Ethics Breach

Milan Markovic, a law professor at Texas A&M who’s taught courses on legal ethics and insider trading, said the indictments reminded him of James O’Hagan, a partner at the Dorsey and Whitney law firm in Minneapolis who was “caught insider trading based on information he found out about deals that he didn’t work on” in the 1990s. The Minnesota Supreme Court disbarred O’Hagan, and he was federally prosecuted in a case that reached the US Supreme Court.

“This is something that’s happened in the past,” Markovic said. “It’s certainly troubling, because clients need to be able to trust their attorneys with their confidential, nonpublic information.”

Law firms typically have policies that inform lawyers they are restricted from making trades based on nonpublic information, said Georgetown’s Frisch.

“Of course if you’re willing to do this kind of conduct you’re not going to tell the truth to the firm,” he said. “It is a serious ethical violation.”

Firms that employed the lawyers that took advantage of the information are unlikely to face ethical, criminal, or civil complaints, Frisch said. But the episode will cast lawyers in a negative light.

“The idea that a law firm had employees who are profiting from inside information certainly doesn’t help the reputation of lawyers,” he said.

The reputation of Big Law firms with former employees accused in the indictments would be determined in part by the level of protection the firms provided to the clients, Markovic said.

“Why should a random associate need to have access to deal information that he’s not part of, right? Why should a lawyer have access if he’s on leave,” he said, referring to Nourafchan, who was on a “leave of absence” from a law firm in 2022 when he allegedly viewed confidential materials for a deal that he did not work on. “If it turns out that the systems were somewhat lax, I think that could be a bit of a problem.”

— With reporting by Chris Dolmetsch, Brian Dowling, Justin Henry, Meghan Tribe, and Mahira Dayal.