Investments
May 30, 2001
S.F. Confidential
Despite the detailed rules and guidelines many law firms enlist to keep confidential information from leaking, firms continue to struggle in this area.
It could've happened to any lawyer who depends on mass transit.
A few years back, an attorney at San Francisco's Farella Braun & Martel was commuting to the office, catching up on some paperwork, when he noticed a passenger reading over his shoulder.
This was no small indiscretion. The attorney was part of a team working to bring a client public. Technically, the company was in what the Securities and Exchange Commission calls a "quiet period," during which insiders need to keep a tight lid on any information that may influence the stock market.
And there the attorney was, riding the BART, reading an SEC registration statement that, while shrouded with code names, was nonetheless decipherable to any astute observer.
In an amazing coincidence, the snooper was an investment banker also working on the deal, says Bruce Maximov, co-head of Farella Braun's professional standards committee. The banker reported the attorney's sloppiness to the team, noting how close the lawyer came to compromising the client's confidence, not to mention violating the SEC's quiet period.
That incident was a reminder to Farella Braun that the firm never can be too careful in taking precautions to protect client confidences, Maximov says.
Despite the detailed rules and guidelines many law firms enlist to keep confidential information from leaking, firms continue to struggle in this area.
Just ask Brobeck Phleger & Harrison. Last year, Julie Freese, a corporate associate in the firm's Palo Alto office, apparently innocently revealed to her boyfriend tidbits of information that, pieced together, indicated Sun Microsystems Inc. soon would acquire Cobalt Networks Inc. of Mountain View for $2 billion.
Freese was working on the deal for Brobeck Phleger, which represented Cobalt. Soon after, Freese's boyfriend traded Cobalt stock, earning nearly $1.2 million in a single day.
As the SEC is wont to do, the agency thought the trading suspicious and brought charges against the boyfriend, who recently reached a plea agreement with the U.S. attorney's office. As part of the deal, he agreed to pay a civil penalty of $286,634, forfeit $536,759 in earnings and perform 200 hours of community service.
Neither Freese nor the firm was accused of wrongdoing in the case. But after being placed on administrative leave from Brobeck Phleger, Freese resigned from the firm.
Freese's attorney, Nanci Clarence of San Francisco's Clarence & Snell, says Freese is taking some personal leave from her legal career after this "very consuming process." Clarence reiterated that Freese was not accused of any wrongdoing and that her name wasn't mentioned in any of the legal documents charging the boyfriend.
"This serves as a reminder that even inadvertent, nonmaterial information can be pieced together in a town as small as Silicon Valley," Clarence says.
Inappropriate use or disclosure of confidential client information is not just a risk for corporate lawyers working on deals. Litigators also can possess information - such as a company's pending settlement of a lawsuit - that, if leaked, could affect a client's stock price.
For its part, Brobeck Phleger has "quite strict" written policies about revealing confidential and material nonpublic information, according to Jim Burns, Brobeck Phleger's managing partner and a member of the firm's 18-lawyer risk management committee. Employees can read those policies in the firm's risk-management manual or on Brobeck Phleger's intranet.
The basic principle, however, is that disclosure of the business or affairs of clients outside the firm is prohibited, Burns says. And within the firm, information is disseminated only on a need-to-know basis.
To enhance these rules, Brobeck Phleger has instituted mechanisms such as the use of code names for potentially high-profile licensing deals and mergers and acquisitions. Those code names are used from the time lawyers open a new matter and appear even on the labeling of file drawers, which are maintained in locked offices or rooms, Burns says.
Drafts of agreements, correspondence and notes are shredded, and the firm employs similar procedures for securing computer-based documents, he says.
Brobeck Phleger employees are cautioned to avoid speakerphones and cellphones for confidential matters, according to Burns. They also are discouraged from discussing deals or litigation on planes, elevators and restaurants and from reading client documents in public places.
In addition, firm rules provide that sensitive information should not travel on the Internet or in external e-mails. Employees are to turn computers off when they leave the office. And, Burns says, Brobeck Phleger even prohibits assistants and secretaries from revealing attorneys' whereabouts because that alone could signal a pending transaction to a savvy outsider.
The lead partner on a sensitive deal is expected to remind the team of these rules at the outset of the transaction, Burns says. And every year, the firm receives a written acknowledgment from the partners, associates and staff that they've read and understood these procedures.
Violation of these polices is "a terminable offense," Burns says. The basic Brobeck Phleger tenet is "use your good judgment."
So why did those protections fail in the Freese case?
"I don't think they failed," Burns says. "The policies depend on and involve people. The policy is clear - it works. Clearly there was a lapse of judgment - innocent, as far as we know. But the policies themselves were not at fault."
Since the incident, Brobeck Phleger's risk-management committee has reviewed the confidentiality protections and solicited input from all the firm's lawyers. Although the firm is "always open to changes," Burns says that the existing policies are "very sound, very comprehensive."
Maximov says that the Freese incident didn't surprise him.
"These things happen," he says. "They're hard to avoid."
While most indiscretions, like Freese's, are inadvertent, there are some that are inevitably deliberate, Maximov says. "People are tempted with enormous financial potential."
In another recent incident involving confidential client information, a federal grand jury in April indicted Malcolm Wittenberg, head of the patent department at Crosby Heafey Roach & May, for insider trading.
Wittenberg had earned a profit of nearly $55,000 after executives at Forte Software Inc., a Crosby client, told him of Sun Microsystems' imminent purchase of Oakland-based Forte. Wittenberg had purchased 2,000 shares of Forte ahead of the deal's announcement.
At Farella Braun, according to Maximov, the protections are similar to those at Brobeck Phleger.
"We impress upon the deal team members - at the outset and throughout - about the risks, personally and to the firm, of trading on nonpublic information or becoming, deliberately or inadvertently, a 'tipper' to someone who trades on the information," he says.
Like Brobeck Phleger, Farella Braun uses code names for the client and matter description, not just on documents but also in e-mail and internal memos about the deal. The firm controls paper flow by disposing of coded draft documents because, Maximov says, "it's not rocket science to identify the companies from the context."
Team members - from partners to paralegals to secretaries - are instructed not to discuss the deal with family or friends, Maximov says. And the firm tries to complete deals as quickly as possible, "or at least get them to the point where the fact of the deal has been deliberately publicized."
In addition to those deal-specific measures, as a matter of continuing risk-management and professional-standards education, the firm periodically reminds everyone about the risks of using or disclosing nonpublic information, Maximov says.
Like Brobeck Phleger, Farella Braun's risk-management manual details its policies. The firm is also in the process of updating its intranet, which will have a risk-management-related "tip-of-the-day" on screen every morning.
The goal is to get the message out to everyone, "not just professional staff," Maximov says. That includes case clerks, night-shift word processors and messengers.
"Effective communication is key," he says. "You can't be too careful."
For Bill Freeman, head of Cooley Godward's 10-attorney risk-management committee, the Freese incident was an opportunity to send out yet another periodic reminder to employees about Cooley Godward's own confidentiality policies.
"My reaction [to the Freese incident] was that it was very unfortunate for all concerned," Freeman says. "For Brobeck, it was unfortunate because I'm sure they have good policies in place."
Like other firms, Cooley Godward's long-standing policy includes use of code names for deals - including at the conflicts check stage - and a standard prohibition on insider trading. Cooley Godward's policy additionally provides that lawyers on a client team must observe the client's own trading restriction window.
Cooley Godward's lawyers also are prohibited from placing speculative trades - that is, purchasing options - in stock of any firm client whether the lawyer is on the team or not, Freeman says.
"We, as lawyers, handle hugely confidential information. We have to be extremely careful because there's little room for mistakes," he says.
Freeman does not see the Freese incident as an example of a firm's client confidentiality protections failing.
"There's no policy in the world that would have prevented this from happening. The best you can do is reduce it to the minimum possible the chance for error, but you can't eliminate it," Freeman says.
"We're all human beings. We make mistakes. The best you can do is foster an environment where employees know the rules and they're enforced. Even in an atmosphere like that, it happens, but you wish it wouldn't," he says.
Contributing Writer
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