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October 20, 2009 6:26 PM

Defense Lawyers: Insider-Trading Charges Should Worry Companies, Hedge Funds

Posted by Brian Baxter

The insider-trading charges announced by federal prosecutors in Manhattan against five top executives and hedge fund billionaire Raj Rajaratnam on Friday are sure to affect how attorneys advise their corporate clients, say several white-collar defense lawyers.

"Companies immediately need to establish their credibility with the government," says Baker & Daniels white-collar defense partner J.P. Hanlon, coauthor of a new textbook on punishing corporate crime. "That helps corporations get control over a situation and allow the government to work with a company to get documentation and data in an investigation."

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Hanlon (right) says companies are likely turning to either in-house or outside counsel to inquire about several issues. The first: whether the company faces potential criminal liability if defendants are found to have committed illegal acts within the scope of their employment and the act was intended to benefit the corporation. Hanlon says the best way to determine this is through an internal investigation.

"The learning curve in this case is pretty steep, as the government says it's been working with a cooperating witness for almost two years," Hanlon says. "Counsel is also going to tell these companies that they'll have to make some immediate decisions with regards to their relationship with these individuals."

Early indications from prosecutors are that the six defendants were acting for themselves when they allegedly shared non-public information to trade stock in companies like Akamai, Google, and Hilton Hotels, thereby mitigating any potential adverse effects on their employers.

"I think it's highly unlikely that there would be a lot of employees at those types of well-known companies that would be engaged in alleged criminal conduct," says Sutherland Asbill & Brennan partner Brian Rubin, a former senior counsel in the SEC's enforcement division.

But some companies contacted by The Am Law Daily aren't taking any chances.

Intel spokesman Chuck Mulloy says the company put Rajiv Goel, director of strategic relations at Intel Capital, on temporary leave for his alleged role in the insider-trading scheme. While the company has yet to be contacted by prosecutors, Mulloy says Intel will conduct an internal investigation. He adds that a decision about whether to retain outside counsel has not yet been made.

IBM spokesman Ed Barbini says the company has put senior vice president Robert Moffat, Jr., on temporary leave following his arrest on Friday. Barbini declined to comment when asked if the company had retained outside counsel to examine Moffat's conduct and work with federal investigators. (Click here for a list of firms that traditionally do work for Intel and IBM, courtesy of Corporate Counsel.)

A call to Galleon Group was referred to an external public relations agency, which didn't return a call by the time of this post. Media relations representatives at Moody's also didn't respond to an interview request and a spokeswoman for McKinsey declined to comment on whether the management consultant had retained outside counsel.

Reuters reports that New Castle Partners, formerly part of Bear Stearns Asset Management, had suspended its cofounder and ousted a consultant implicated in the insider-trading charges. The fund has retained Skadden, Arps, Meagher, Slate & Flom and will cooperate with authorities.

The criminal nature of the allegations against the defendants also calls into question whether employers will advance attorneys' fees for their employees, Hanlon says, adding that the bylaws of some companies authorize mandatory payments for legal counsel if a high-ranking employee is accused of misconduct.

"Some corporations [mandate] this simply so they do not have to make separate decisions on whether or not to advance fees on a case-by-case basis," says Hanlon, noting that if an employee is eventually convicted of criminal conduct a company can try and recoup those fees afterwards through clawback provisions.

As Hanlon sees it, given the nature of the much-ballyhooed wiretaps, lawyers also will have to adjust their longstanding advice that clients not put anything in an e-mail that they wouldn't want to have on the front page of The Wall Street Journal.

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"We're seeing more investigations in the past six-to-eight months, and this case is certainly a wake-up call to hedge funds, which have traditionally enjoyed hands-off treatment [from regulators]," says Brad Simon (left) of New York's Simon & Partners. "It's a welcome departure, because I can't tell you how many times I've had to battle the SEC and the feds over nonsense for people who have limited assets."

Despite the fact that the insider trading investigation began two years ago, Simon, a former federal prosecutor, believes the charges against Rajaratnam and others mark a turning point for regulators in this post-Madoff era. It's a notion seconded by Sutherland's Rubin.

"I think it's likely that we'll see more cases like this in the future," he says. "In the past the SEC, NASD, and FINRA have looked for trading 'blips' after announcements and then done an investigation. With the wiretaps, it sounds like they were looking at real-time activity to see the trades as they were happening."

Leaving many on Wall Street to wonder whose listening the next time they pick up the phone.

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