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OP I N ION BY JIM MIDDLEMISS BACK PAGE Time to clean up H ow safe are capital mar- kets from the prying eyes of unethical M&A lawyers? Not very, apparently, seeing as authorities on both sides of the border continue to lay insider-trading charges against lawyers with big law connections. The latest came in April, when U.S. lawyer Matthew Kluger of Wilson Sonsini Goodrich & Rosati PC was charged with insider trading in an alleged scheme that made more than $32 million in profits over five years. According to federal prosecu- tors, Kluger, whose career path has taken him through notable firms like Cravath Swaine & Moore LLP and Skadden Arps Slate Meagher & Flom LLP, is alleged to have passed firm information about deals to a middleman who then passed the info onto a stock trader. The trader would buy shares ahead of deals becoming public. Closer to home, last November, Canadian lawyer Mitchell Finkelstein, then a partner at Davies Ward Phillips & Vineberg LLP, was charged by the Ontario Securities Commission with insider trad- ing involving an alleged scheme that net- ted about $3 million between 2004 to 2007. The OSC alleges that Finkelstein "sought out and acquired material, non- public information about potential cor- porate transactions through his role as a lawyer at Davies" and allegedly passed the info onto fraternity pal Paul Azeff, a trader at CIBC World Markets. After each deal, Finkelstein is alleged to have made cash deposits into his bank account involving $50 and $100 bills. These allegations must still be proved in court. Sadly, the scenario is similar in nature to recent settlements the OSC has secured involving lawyers and tipping and insider trading. Take the infamous case of Gil Cornblum, who ran the Toronto office of Dorsey & Whitney LLP, and his long- time school chum, lawyer Stan Grmovsek who in January 2010 was sentenced to 39 months for insider trading. The poster boys for insider trading by lawyers hatched their scheme as articling students. Cornblum, who also worked at firms like Sullivan & Cromwell LLP, Fraser Milner Casgrain LLP, and the former Meighen Demers, killed himself before he could be tried. In their scheme, Cornblum would pass info to Grmovsek, who once worked at Osler Hoskin & Harcourt LLP, but stopped practising law in 1997. He would trade on Cornblum's information. They made more than $9 million in profits on 46 deals. It's not just lawyers that investors have to fear. Betty Leung, a legal secretary at Bennett Jones LLP, used firm information to make $51,500 on inside trades before she was caught. What's startling about these revelations is how the lawyers were so quick to throw away their reputations and careers. Over 25 years, an M&A lawyer can likely earn $10 million to $20 million and lead a pros- perous life. Why throw it all away for a few million dollars in illicit profits? Granted, these examples are a fraction of the deals that take place in the capital markets. So it's not clear how widespread insider trading is among the legal frater- nity. However, it doesn't send a vote of confidence to investors when lawyers and support staff at law firms working on the deals are caught trading on information. It's concerning enough that OSC chairman Howard Wetston warned in February that he is making it a prior- ity to chase down bad guys at places like law firms. He told the Economic Club of Canada the OSC is "intensify- ing" enforcement. "Staff have developed proprietary technology that allows them to better identify possible illegal trading prior to public disclosure of mergers and acquisitions. They are casting a wider net beyond traditional targets to include professionals and other service providers who are privy to confidential information during corporate transactions." Clearly, law firms need to do more to protect information stored in their digital information vaults. The recent insider- trading conviction of U.S. hedge fund dealer Raj Rajaratnam shows the extent to which parties will go to get an edge in their trades. He corrupted a high-level execu- tive at the prestigious Boston Consulting Group. Lawyers are not immune to sim- ilar overtures. Since law firms are the repository of deal data, the profession must be extra diligent in protecting it. Clearly there is a problem, yet legal regulators remain mute. They need to dis- cipline a firm or two to send a message. If law firms and law societies can't or won't regulate the conduct of lawyers when it comes to the capital markets, maybe it's time to turn that responsibility over to other bodies, such as the securities com- missions. The U.S. Securities and Exchange Commission has a rule that governs who can or can't practise before it. Maybe we need similar legislation here? That, or let the class action lawyers loose. Maybe they can clean up what is starting to look like a broken, even corrupted, system. Jim Middlemiss, jmiddlemiss@webnews management.com, is a Toronto lawyer and co-owner of WebNews Management Corp. The McKellar Structured Settlement™ 46 JULY 2011 www. CANADIAN Lawyermag.com Untitled-2 1 12/8/10 3:45:27 PM insider tr adin g