How top Wall Street law firms became a pipeline for insider trading

Lawyers at Goodwin Procter were representing iRobot, maker of the automated Roomba vacuum cleaners, as talks to be acquired by Amazon heated up in the summer of 2022.

In the following months, according to US authorities, a network of more than a dozen people — including three brothers and a hairdresser — began amassing iRobot stock and options. When a deal was announced that August, the group allegedly netted more than $1.7mn in profits; two members of the ring texted each other with champagne emojis.

US prosecutors and securities regulators now say they were working off intelligence that came from inside Goodwin Procter itself.

In criminal charges unsealed on Wednesday, prosecutors said Nicolo Nourafchan, a 43-year-old Yale Law graduate who worked at elite firms Sidley Austin, Latham & Watkins and Goodwin, was at the centre of a decade-long insider trading scheme.

This alleged scheme extended from the halls of Ivy League law schools to Wall Street law offices to pilfer confidential deal information from the firms and feed it to a web of friends and contacts.

Authorities have charged 30 individuals. The Securities and Exchange Commission separately filed civil charges against 21 individuals.

Advising on mergers and acquisitions has become one of the most lucrative areas of business for Wall Street law firms, with even junior associates now earning hundreds of thousands of dollars a year. The work makes firms custodians of confidential information on multibillion-dollar public company transactions, leaving them little choice but to put their faith in their employees.

“What’s outstanding about this is it was a really comprehensive plan over almost a decade to mine law firm information for serial mergers,” said David Axelrod, a litigator at Ballard Spahr and former US prosecutor.

In a statement, Goodwin said: “We are deeply disappointed that a former employee is alleged to have violated the trust placed in him and misused confidential information as part of a broader criminal scheme affecting multiple law firms and their clients.”

Over the course of a decade, Nourafchan allegedly passed information on pending deals to his George Washington University college classmate Robert Yadgarov and others.

Nourafchan and Yadgarov, who has his own personal injury practice, also recruited two other early-career corporate lawyers to share information, according to prosecutors.

In 2014 they allegedly involved Avi Sutton, according to multiple people familiar with the matter as well as matching information from the indictment with public records. Sutton attended Yale Law School with Nourafchan and was working at Wachtell when he allegedly shared his first tip, regarding Burger King’s imminent acquisition of Tim Hortons. He has not been indicted, and appears as an unnamed co-conspirator in one of the indictments.

A few years later, Nourafchan began socialising in New York City with another George Washington classmate, Gabriel Gershowitz, whom he knew was also an M&A lawyer.

Nourafchan and Yadgarov taught him about the scheme and told him they’d earned “several million dollars in illicit profits”, according to the SEC complaint.

Gershowitz, a graduate of Columbia Law School, was working at Weil Gotshal in 2019 when he allegedly began sharing tips.

An attorney for Gershowitz declined to comment. Sutton could not be reached for comment. Attorney information for Nourafchan or Yadgarov could not be found.

According to prosecutors, the friends shared tips on nearly 30 deals involving such companies as Johnson & Johnson, Qualtrics and Occidental Petroleum. Traders allegedly made a collective tens of millions of dollars of illicit profits.

The lawyers were paid kickbacks from the trading proceeds, according to prosecutors. In the first five years of the scheme, Yadgarov allegedly collected more than $6.3mn in kickbacks from a single trader based in Russia, some of which he passed on to the other lawyers.

A former friend and law school classmate of one of the lawyer defendants told the FT that even as dealmaking was a glamorous and high-paying profession, the pressure to keep up a lifestyle with peers in New York City created a crushing demand for cash.

As Nourafchan attempted to convince Gershowitz to join the scheme in 2018, he explained to his friend how he accessed information on deals, according to the SEC complaint. Nourafchan said he viewed documents in the firm’s document management system “in preview or read-only mode” to minimise detection, the complaint says.

Prosecutors alleged he at times accessed documents from deals he was not assigned to work on, including the iRobot deal. Nourafchan, while on a “leave of absence” from Goodwin, accessed a draft merger agreement and other files, according to authorities.

In the iRobot deal, a childhood friend of Nourafchan’s met with a trader at a Florida casino to share the tip, according to authorities. The childhood friend also shared information with the three brothers, authorities allege, who had a WhatsApp chat group called “Brothers in the Market.”

Nourafchan also allegedly tipped off his brother Lorenzo to the pending transaction, who told his hair stylist who told a friend.

Ahead of the public deal announcement, the hair stylist’s friend bought iRobot shares and out-of-the-money call options, according to prosecutors. When Amazon announced it was acquiring iRobot in August, the friend texted the hair stylist: “You were right.” Amazon and iRobot later abandoned the deal.

“You have to wonder how so many smart folks thought that this would work,” said Bill Singer, a former regulatory defence lawyer. “It did work and flourished for a decade, so maybe the smart folks were smart, but not smart enough for the long haul.”

Another instance in the indictments involves the investment bank LionTree, where Sutton began working in 2022. He was the bank’s general counsel and as recently as last week was listed on LionTree’s website as part of its executive leadership.

The following year, Sutton allegedly shared a tip with Yadgarov related to a potential acquisition of Adevinta, as LionTree was advising one of the online classifieds company’s largest shareholders.

LionTree said in a statement, “We are aware of the filing identifying LionTree as one of many victims in this alleged scheme. There are no allegations of wrongdoing against the firm. The individual in question was immediately placed on leave and is no longer active at the firm.”

“No matter how strong a firm’s training, policies and procedures are, it is still unfortunately possible for a bad apple to breach client confidences and break the law,” said Josh Naftalis, a litigator at Pallas Partners and former federal prosecutor.

Wachtell and Latham said in statements that the accused individuals had not been associated with the firms for several years, stressing that both individuals acted in contravention of their policies and the firms were not accused of wrongdoing.

Weil said in a statement that the alleged conduct was “extremely serious” and that the accused individual had not been associated with the firm in over six years. It also noted that the firm was “among the victims of the alleged scheme.”

Sidley did not respond to a request for comment.