Preparing for criminal insider-trading charges


Financier Worldwide Magazine

December 2013 Issue

December 2013 Issue

Since 2009 the US Securities and Exchange Commission (SEC), the US Federal Bureau of Investigation (FBI) and the US Department of Justice (DOJ) have been taking action to combat what they perceive as a systemic threat to the health of the US capital markets: insider trading. While the SEC can bring only civil actions, the DOJ has been aggressively (and quite successfully) pursuing criminal actions. 

The FBI and DOJ are using investigative techniques (such as wiretaps and confidential informants) that had been the go-to arsenal for combating violent and life-threatening crimes, such as drug trafficking and terrorism. 

Moreover, these regulators have made clear in numerous public statements that they have no intention of shifting their focus. 

While the types of individuals caught in the regulators’ crosshairs vary – ranging from securities professionals to corporate executives to lawyers – it is clear that institutions with active trading floors, such as investment advisers to hedge funds, have significant exposure. These institutions also have significant potential for media exposure when their principals or traders are arrested. 

If the adviser finds itself in circumstances where employees or principals of the firm are facing possible arrest, what should be done? What can follow are arrests, the regulators’ press conferences, and possibly a ruinous media frenzy. 

This combination of events is frightening for even the most seasoned GCs and CCOs, but thoughtful preparation may allow your adviser to weather this potential storm. 

Hold ‘bake-offs’

Today, GCs and CCOs are well advised to identify early in the process white-collar criminal defence attorneys that could be engaged quickly. This involves interviewing candidates to find a good fit and then clearing potential conflicts of interest. 

Depending on the circumstances, a GC/CCO may need to identify at least three separate law firms for engagement: (i) defence counsel for the adviser; (ii) defence counsel for the implicated individual (to help ensure the individual is released from custody as quickly as possible to partially stem the adviser’s new public relations nightmare); and (iii) pool counsel. 

Pool counsel is a law firm retained by and at the expense of the adviser and that is made available to the adviser’s employees. The attorney-client privilege runs between pool counsel and the employees. The purpose of pool counsel is three-fold: (i) to help instill a sense of calm among the members of the investment staff; (ii) to determine, through confidential interviews with employees, the extent to which wrongdoing may have pervaded the adviser; and (iii) to provide, on an ongoing basis, free legal representation to employees who are later implicated or may receive ‘visits’ from regulators, like FBI agents. An adviser can make pool counsel available to the adviser’s employees but cannot require them to use pool counsel or even to meet with pool counsel. 

Ideally, pool counsel will come to the adviser’s offices no later than one day after any arrest and, in a group meeting, educate the employees on their purpose. 

Also, an adviser would be well-served to conduct advance due diligence into crisis communications. After an arrest, one of an adviser’s first calls should be to the crisis communications firm because: (i) the regulators are expert at cultivating relationships with the press; (ii) all of the adviser’s key service providers will be closely watching the press coverage; and (iii) this coverage will strongly influence their decisions as to whether they will remain as the adviser’s key service providers. 

Begin shoring up the adviser’s relationships with key service providers now

If key investment staff are arrested for insider trading, it is possible the adviser will suffer client losses and will need to consider a wind-down. The success of the wind-down is dependent on the support of the adviser’s key service providers: prime and executing brokers; the funds’ auditors, the administrator; and, where applicable, the funds’ independent directors. 

Determine now why the adviser is using the services providers that it is. Who on the adviser’s staff introduced them to the firm? Are these people still with the adviser? If not, who has personal relationships with these service providers now? Do these service providers have obvious conflicts in the event of a crisis? By agreement, most service providers can terminate the relationship for no reason with little or no notice. But just because they can doesn’t mean they will. 

Have key emails ready to go

There are two key emails that should be ready to go: (i) the ‘document retention’ email to all employees that relates to investigations/litigation; and (ii) the ‘reminder’ email to all employees of their confidentiality and fiduciary duties. It is advisable to include the contact information for the adviser’s designated press contact in this email, with a reminder that employees are not authorised to speak for the firm. The media can be particularly aggressive in trying to get the adviser’s employees to talk.

It is helpful to have an email in draft form intended for investors to help reassure them that the adviser has things under some semblance of control, if possible. Because the content of this email will be driven by the underlying specific circumstances, consider drafting various versions in advance so as not to be starting from scratch when compelled to send them. 

For the foreseeable future, all written communications should be drafted with the mindset that they can end up in the press. As such, it is essential to clear these communications with outside counsel before distributing them. Also, consider researching online examples of communications previously distributed by advisers dealing with insider-trading crises.

Assemble an ‘impairment checklist’

After an insider-trading action, the GC, CCO and other senior members of the adviser’s staff will need to determine in short order if the repercussions are so severe that the adviser can no longer function. Now is the time to work with the business staff to assemble a list of potential material impairments, which can include, for example: (i) diminished trade execution capabilities; (ii) the adviser’s analysts’ ‘excommunication’ from meetings with management and exclusion from industry events; (iii) the loss of the independent directors (particularly for offshore funds); (iv) the loss of custodians or administrators; and (v) an onslaught of redemption requests. 

If you end up needing to hold impairment analyses meetings, consider an appropriate process to seek to prohibit participants from distributing information to third parties. 

Set up an alternative checking account

The fallout can extend to the bank at which the adviser has its checking account and it is extremely difficult to function without a checking account, particularly during a crisis. Consider opening a checking account with a regional bank now while it is still possible to make the representations that there are no threatened or pending regulatory actions against the adviser or its principals. 

Plan for the worst, hope for the best

While the best case scenario is one that does not involve insider trading charges, accepting it as a possibility can provide the motivation to undertake preparedness measures. And a well prepared GC/CCO helps to instill the confidence of others in the adviser’s ability to navigate through such a crisis.


Carolyn A. Miller is counsel at Goodwin Procter LLP. Ms Miller can be contacted on +1 (212) 459 7103 or by email:

© Financier Worldwide


Carolyn A. Miller

Goodwin Procter LLP

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