The Department of Justice and the Securities and Exchange Commission are not specifically tasked with protecting client confidentiality of U.S. corporations. But the calculus changes when service providers use their client’s confidential information to profit from insider trading.
An information technology employee with Wilson Sonsini Goodrich & Rosati and the CEO of an investor relations firm were recently accused of doing just that. Stephen Gray and Dimitry Braverman face parallel criminal prosecutions and SEC lawsuits.
In short, they each had access to a wealth of confidential client information. The government alleges that each used this information to reap large profits from transactions in advance of merger and earnings announcements.
Mr. Gray has pleaded guilty to one count of securities fraud.
Stephen Gray – Investor Relations Firm
Mr. Gray is the former CEO of Dennard Lascar Associates. Dennard Lascar is an analytical services firm that helps companies manage investor relations. In other words, Dennard Lascar helps its clients present information to their investors. Employees at the Houston-based investor relations firm help their clients draft and publish press releases about earnings, mergers and acquisitions, and important performance events and milestones.
[In an interesting side-note, the current CEO is Ken Dennard, the founder of the company. He is a former professional NBA player, where he played for the Kansas City Kings. The Kanas City Kings became the Sacramento Kings in 1985.]
Back to the story.
Access to such sensitive and valuable information could seem seductive to an employee who trades in securities. Recognizing this, Dennard Lascar takes a hardline stance against abuse of confidence and insider trading. For every new client, the firm signs a standard agreement ensuring the protection of that client’s confidential information. In addition, any employee with access to confidential information is forbidden from all forms of trading.
That’s right. Employees were not just barred from trading in the securities about which they had non-public information; employees with any confidential information were cautioned not to do any trading.
That’s a serious compliance policy.
And Mr. Gray apparently drafted it.
It doesn’t appear that he followed it, though.
Mr. Gray supposedly borrowed funds from his life insurance policy to open a brokerage account. Between May 2011 and May 2012, the SEC alleges, Mr. Gray bought equities and increasingly risky put and call options on his clients’ stocks.
The risk of those transactions, however, was supposedly mitigated. According to the SEC, Mr. Gray bought and sold with advance knowledge of the companies that would result in near-guaranteed profit (or avoided loss) for every transaction.
The SEC’s complaint paints a picture of Mr. Gray as a trusted figurehead in the office, with unfettered access to nearly every piece of confidential information Dennard Lascar possessed. Inside the office, the SEC alleges, confidential information moved freely; employees talked unreservedly about clients with one another and bits of client information could easily be overheard.
In addition, the SEC’s complaint suggests that lower level employees would often come to Mr. Gray, an experienced high-level executive, for counsel as they composed their clients’ press releases. With such a wide array of information from which to choose, Mr. Gray supposedly had the ability to see any opportunity to profit from options on Dennard Lascar clients’ stocks.
Mr. Gray supposedly profited by approximately $300,000.
On September 29, 2014, a plea agreement was filed in the Southern District of Texas. Mr. Gray pleaded guilty to one count of securities fraud. Mr. Gray agreed to a partial judgment on liability in the SEC case, but the SEC and Mr. Gray have not yet reached agreement on the appropriate penalty. (The criminal case resolution will likely help move that along.)
Dimitry Braverman – Wilson Sonsini IT Employee
In 2011, a Wilson Sonsini lawyer named Matthew Kluger pleaded guilty to leading a 17-year insider trading scheme that generated $37 million. He was sentenced to twelve years in prison. A fascinating interview about his life in prison is here.
Now, Wilson Sonsini is back in the headlines for insider trading by an employee.
Mr. Braverman worked for Wilson Sonsini in the San Francisco Bay area as an IT employee. According to the indictment, Mr. Braverman had access to sensitive financial information on several technology and pharmaceutical companies, which he exploited to the tune of nearly $300,000.
I’ve written before about an IT employee’s alleged insider trading.
Wilson Sonsini primarily advises companies in mergers and acquisitions. Mr. Braverman’s criminal complaint states that working at the firm gave him access to
matter-opening, conflict check, billing, and other information that provided him information about potential mergers and acquisition activities.
This confidential information supposedly placed him in an excellent position to predict the movements of the market. Mr. Braverman is charged with buying stock and options in Wilson Sonsini clients before mergers and partnerships were announced. The prosecution says that Mr. Braverman would liquidate his positions once the information went public, and his positions became profitable.
Mr. Braverman’s alleged insider trading began in early 2010. When Mr. Kluger was sentenced in April 2011, Mr. Braverman allegedly sold his position in Seagate Technologies, PLC. He even missed out on a surge in Seagate Tech’s stock price when, two weeks later, the firm announced a strategic partnership with Samsung Electronics Co. Ltd.
But this fear allegedly did not last long. The government says that Mr. Braverman began insider trading again in November of 2012. By the final transaction alleged in the criminal complaint, Mr. Braverman was taking in more than $100,000 on each trade.
Do These Charges Hold Water?
From the allegations against Mr. Gray, it’s not entirely clear he did anything illegal. Simply violating his company’s policy against trading is not a crime. (Nor should it be. Can you imagine the prosecutions that could then be brought for violating a dress code or taking an extra pack of copy paper home?)
Simply saying that Mr. Gray had access to inside information because he worked at Dennard Lascar and confidential information is freely exchanged among employees is a far cry from alleging that he had knowledge of specific information and then used that specific information to engage in illegal trades.
But none of this matters. The plea is done.
The charges against Mr. Braverman may be even easier to prove than those against Mr. Gray, since it sounds like the government may try to forensically prove that he had access to certain information. Again, though, the idea that he had access to all of the confidential information may make the government’s case harder to prove.
The government needs to prove that he had access to and used confidential information about a specific company in which he traded.
The government may have proven too much. I don’t say that very often.