NEW YORK, Nov 5 (Reuters) – A Ropes & Gray lawyer’s arrest in an insider trading case has embarrassed the corporate law firm in the latest scandal to cast a harsh spotlight on legal partnerships that oversee billions of dollars in deals each year.
U.S. prosecutors alleged on Thursday that Arthur Cutillo, in Ropes & Gray’s litigation department, gave out inside information about deals by the law firm’s clients.
These deals include buyouts by private equity firms like TPG [TPG.UL], Bain Capital and Silver Lake, all of whom used Ropes & Gray as their counsel. Cutillo joined the firm in 2005 and his practice focused on intellectual property.
Cutillo is one of 14 people newly charged in the biggest hedge fund-related case in history. The charges come nearly three weeks after Raj Rajaratnam, billionaire founder of hedge fund firm Galleon Group, and five others were arrested.
“For a law firm to have this out there is very, very uncomfortable because there is this immediate sense that that’s a major black eye,” said an mergers and acquisition lawyer at a major law firm. “No law firm wants to see its name in the lights in this way.”
Ropes & Gray said it was deeply disappointed and that the allegations suggest “an extreme breach of this person’s duty of trust to our clients and to the firm.”
Ropes & Gray, which was has more than 1,000 lawyers and professionals, said it was moving quickly to protect clients and co-operating fully with authorities.
POLICIES AND PROCEDURES
Cutillo is not the first lawyer to be allegedly involved in an insider trading scandal.
His arrest comes just days after a respected Toronto lawyer apparently committed suicide, while his alleged accomplice pleaded guilty to U.S. and Canadian criminal charges stemming from a 14-year insider trading scheme.
The lawyer, Gil Cornblum, worked in the Toronto office of Dorsey & Whitney LLP. He was a partner there when Dorsey fired him in May 2008, according to the U.S. Securities and Exchange Commission.
The SEC alleged some trades took place between 1994 and 1998, when Cornblum was “articling” in a Toronto law firm and later worked in the New York office of Sullivan & Cromwell.
One of the defendants in the case unveiled on Thursday, Michael Kimelman, is also a former Sullivan & Cromwell attorney, although he was at the elite New York-based firm for less than two years and left more than 10 years ago.
“Beyond policies and procedures, it’s fundamentally about the culture of the institution,” said John Reiss, global head of White & Case’s mergers and acquisitions group, without referring to any specific firm. “It’s the institution’s job to assure, quite simply, that people know not to communicate in any context private information.”
But mergers and acquisition lawyers at some rival law firms sympathized with Ropes & Gray’s predicament, saying the scandal could happen anywhere and clients are ultimately likely to see this as a one-off case due to a rogue employee.
“The policies are sufficient. It’s just human nature is what it is,” said Harold Gordon, a partner in Jones Day’s SEC practice. “It is virtually impossible to stop a rogue attorney from revealing client confidences if they are going to insist on doing that.”
These experts added that despite other recent insider trading cases involving corporate lawyers, law firms have enough policies and procedures in place and that such cases happen due to bad actors that no one can totally stop.
Indeed, one private equity firm said that a single rogue employee would not influence their decision to use the firm.
A spokesman for Ropes & Gray declined to comment further.
In a sign that it is business as usual for now, the firm advised TPG and Canada Pension Fund on a $4 billion buyout of IMS Health Inc (RX.N) — the biggest leveraged buyout deal of the year — announced on Thursday.
By Paritosh Bansal
(Additional reporting by Megan Davies; Editing by Tim Dobbyn)