A shorter version of this article originally appeared on Bloomberg Law , part of Bloomberg Industry Group, Inc. (800-372-1033), and is reproduced here with permission. The footnotes, which contain material that did not appear in the Bloomberg Law version of the piece, are a form of “bonus content” for Original Jurisdiction subscribers. 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. They worked at firms such as DLA Piper, Goodwin Procter, Latham & Watkins, Sidley Austin, Wachtell Lipton, Weil Gotshal, and Willkie Farr. 1 Based on these lawyers’ careers up to now, I’d guess that they are intelligent, hardworking, and capable of both self-control and long-term thinking. 2 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? 3 At present, we’re dealing only with allegations, and the defendants are presumed innocent. 4 But to better understand why lawyers in Biglaw 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 Biglaw 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 about the underlying facts of Nourafchan and Fejal , 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 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. 5 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 Biglaw 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 presumably 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 U.S. District Court for the Southern District of New York. (In our conversation, Judge 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 take years to investigate and prosecute. According to Judge 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. 6 “We shouldn’t ignore the obvious greed factor,” Judge 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.” Burford Capital helps companies and law firms unlock the value of their legal assets. With a portfolio of over $7 billion and listings on the NYSE and LSE, Burford provides capital to finance high-value commercial litigation and arbitration—without adding cost or risk or giving up control. Clients include Fortune 500 companies and Am Law 100 firms, who turn to Burford to pursue strong claims, manage legal costs and accelerate recoveries. Learn more at burfordcapital.com . 1 There are no allegations of wrongdoing against any of the firms. To the contrary, any firms mentioned in the indictments are referred to as victims, and all have been cooperating with law enforcement. 2 Thinking like mine could be called “ T14 ” or “Biglaw exceptionalism”: the notion that attorneys who graduate from elite law schools or work at prominent law firms are somehow smarter or more ethical, whether compared to lawyers writ large or human beings more generally. It’s a form of the elitism that permeates the legal profession more generally. But is this thinking justified? Should we really be surprised that lawyers have been accused of criminal conduct, simply because they graduated from prestigious law schools or worked at top law firms? To the extent that some of us are surprised, we might be placing too much weight on certain credentials. As someone who has been writing about misbehaving lawyers for years, I can attest that they come from all parts of the profession. And by engaging in T14 or Biglaw exceptionalism, we might be perpetuating an elitism that many have argued is harmful to both legal education and the legal profession more generally. 3 Although prosecutors allege that the overall scheme, which ran for roughly a decade, generated “tens of millions of dollars in illicit insider trading proceeds,” it appears that the lawyer participants received, at most, a few million apiece. They easily could have earned more through successful careers, whether in Biglaw or the types of jobs people take after working in Biglaw—e.g., high-paying positions in corporate legal departments or the business world. (For more discussion of how much these lawyers allegedly earned from the ring, see Judicial Notice (05.10.26): You Chose… Poorly , under “Litigation of the Week.”) 4 At least one of the lawyer defendants—Robert Yadgarov, who runs his own personal-injury firm in New York—has already announced his intent to fight the charges. His attorney, Mark Lesko, told The Wall Street Journal , “We intend to vigorously defend Robert in this case.” 5 The lawyers who allegedly participated in the scheme apparently knew each other through their time together as undergraduates (at George Washington University) or as law students (at Yale). I’d be interested to learn more about their relationships with each other and whether they might have had other reasons—beyond their shared alma maters, and beyond the alleged conspiracy—for remaining in touch over the years. 6 In the wake of the indictments, there’s been a fair amount of discussion over whether law firms don’t have enough controls in place to protect against insider trading—including measures as simple as making material nonpublic information available internally on a need-to-know basis. See, e.g., The American Lawyer (by Dan Roe), Bloomberg Law (by Professor Karen Woody), and Reuters (by Sara Randazzo). As Milan Markovic, a law professor at Texas A&M who has taught courses on legal ethics and insider trading, said , “Why should a random associate need to have access to deal information that he’s not part of, right? If it turns out that the systems were somewhat lax, I think that could be a bit of a problem.” Sara Randazzo—formerly a business-of-law reporter for The Wall Street Journal, now a columnist at Reuters —reached out to several law firms about their security protocols, but they didn’t respond. She noted that even though the scheme allegedly involved situations where lawyers were able to access information about deals they weren’t working on, some of the allegations date back to 2014, “so it’s very possible the law firms involved have since sharpened their practices.” To the extent that firms are or were too lax in limiting access to information, what might explain that? According to Randazzo, “setting tight restrictions on internal documents can be tedious, requiring hundreds of individual permissions to be granted and constantly monitored,” and “[l]ooking for anomalies in who is opening documents is tricky.” In addition, it’s often more convenient to make information widely available within a firm. Lawyers seeking a precedent or template for a certain type of document they’re drafting might want to look at a very recent example of such a document—and the most recent examples often relate to deals that have not yet been announced. “There are reasons you might want associates to have access to everything,” said Todd Haugh. He noted that Biglaw partners aren’t always the most patient people—and if it takes longer for an associate to draft a certain document because they can’t get immediate access to a precedent or template they need, that could annoy the partner. But he predicted that firms will have no choice but to get with the program when it comes to safeguarding sensitive, nonpublic information. “Law firms, which are generally less tech-savvy and more traditional than many other businesses, are probably way behind in this regard,” he said. “But they will have to get more savvy and follow the best practices of companies in other sectors, including highly regulated industries like financial services, healthcare, technology, and aerospace.” Besides the cumbersomeness of limiting access and the convenience of having unrestricted access to information, here’s another factor that could have contributed to an overly lax data-security regime: Biglaw exceptionalism. Firm leaders might think, “Why do we need to take such measures? No lawyer who managed to get hired at our distinguished law firm would ever engage in insider trading.” “There’s sometimes this idea that because white-shoe firms hire only ‘good people,’ their lawyers are always going to be ethical,” Haugh told me. “But as we know from research in criminology and behavioral ethics, that worldview doesn’t take into account the reality of the human condition.”Read More
