Arrest spurs law firms to review security

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The insider-trading arrest of a Ropes & Gray attorney has caused alarm at some law firms, which are seeking new ways to guarantee they don’t breach client confidentiality – either by accident or design.

Arthur Cutillo, 33, of Ridgewood, N.J., released “material, nonpublic information” about mergers and acquisitions involving Ropes & Gray clients to Wall Street traders and hedge fund managers who made over $20 million trading on the tips, the government said in court papers filed in Manhattan. Cutillo and 13 others were arrested Nov. 5 as part of the Justice Department probe of insider trading related to Manhattan hedge fund Galleon Group.

“The Ropes & Gray thing is big news,” said John Alber, head of the client technology group at St. Louis-based law firm Bryan Cave. “People are worried about the risks.”

Bryan Cave produces educational software for companies on insider-trading law. While most law firms already have policies governing the trading of stocks related to clients or companies they are merging with, within a week of Cutillo’s arrest, Alber said his firm received inquiries about the tutorial from three large U.S. law firms he declined to identify.

Cutillo, who no longer works at Boston-based Ropes & Gray, passed along tips on at least four company acquisitions the law firm was advising on, prosecutors alleged.

One of the firm’s clients was Bain Capital, which said it would buy 3Com Corp. for 44 percent more than the stock price. Cutillo owned part of a 75,000-share 3Com stake bought using information he passed on ahead of the 2007 deal in exchange for kickbacks, according to court documents. The stock was sold at a profit before Boston-based Bain backed away from the deal, the FBI said in a criminal complaint.

Cutillo’s lawyer, Bryan Blaney, denied any wrongdoing on the part of his client.

Ropes & Gray said in a statement, “We are deeply disappointed to learn about this situation, which suggests an extreme breach of this person’s duty of trust.”

The criminal and Securities and Exchange Commission complaints against him don’t explain how Cutillo, an intellectual property lawyer, allegedly obtained his tips. Justice Department and SEC officials declined to comment.

Intellectual property attorneys can gain access to confidential deal documents even if they aren’t directly involved in the transactions, one mergers and acquisitions lawyer said.

“The people on the front lines are the M&A lawyers, but in the background are all these other practice areas, including IP, who are also essential to the deal,” said Brian Hoffmann, a mergers and acquisitions attorney at law firm Clifford Chance.

“People who manage risk in the firms have to be very cognizant of it,” said White & Case General Counsel Phil Schaeffer, who oversees the firm’s ethics policies and training. Of the Cutillo case, he said, “It’s just evidence of the need to be vigilant.”

White & Case, based in New York, revised its securities-trading rules at the beginning of this year, Schaeffer said.

A partner or employee wanting to trade in a publicly held company needs permission from a division of the law firm that monitors conflicts of interest and new business, he said, adding that White & Case has annual training for lawyers and staff.

Lawyers and staff must sign statements saying they know and comply with the policies, Schaeffer said. A violation can lead to action as serious as firing, he added.

Bryan Cave’s program on securities trading rules covers who is an insider, the elements of insider trading, when trading is illegal and compliance, Alber said.

New Yorker magazine cartoons appear throughout, including one in which a man asks a judge, “Are you telling me that just because something is against the law, that makes it illegal?”

The criminal case is U.S. v. Goffer, 09-mj-02439; the civil suit is Securities and Exchange Commission v. Cutillo, 09-cv-09208, U.S. District Court, Southern District of New York (Manhattan). MO