The SEC today announced an insider trading case that allegedly flowed from information obtained by a managing clerk at law firm Simpson Thacher & Bartlett. The clerk, Steven Metro, allegedly used a tactic previously employed by several other defendants who worked in law firms to obtain inside information about upcoming corporate deals: accessing confidential documents in the law firm's computer system.

According to the SEC, Metro used a middleman to pass inside information to a stockbroker, Vladimir Eydelman, who engaged in insider trading based on the tips that generated illicit profits of $5.6 million during a four-year period.

Metro, Eydelman and their middleman (a mutual friend) allegedly engaged in several maneuvers in an effort to avoid being caught and to avoid liability if they were caught. According to the SEC:

Metro typically met the middleman at a New York City coffee shop, where he would pass on the inside information by typing on his cell phone screen the names or ticker symbols of the two companies involved in the transaction.  Metro would then indicate which company was being acquired and the approximate price and date of the transaction.

The middleman would then meet Eydelman near the clock at the information booth in 

Grand Central Station. The middleman would show Eydelman a post-it note or napkin with the name and/or ticker symbol of the company being acquired, and further convey the approximate price and date of the transaction. The middleman "then chewed up, and sometimes ate, the piece of paper. The purpose of doing so was to destroy the evidence of the tip. Eydelman watched the Middleman dispose of the paper this way."

Eydelman would then return to his office and typically gather research about the target company.  He then e-mailed that research to the middleman "along with his purported thoughts about why buying the stock made sense. The contrived e-mails were intended to create what Eydelman and the middleman believed to be a sufficient paper trail with plausible justification for engaging in the transaction." [Note: A similar tactic of creating a paper trail of research "supporting" a trade based on inside information was also allegedly employed by the traders at Galleon].

To borrow, paraphrase and somewhat butcher a line from Rob Khuzami that he made in 2009 in the context of the Octopussy case, "there should be a moment — hopefully before you're watching your friend chew up and eat a napkin bearing inside information in the middle of Grand Central Station — that causes anyone in a position to tip or trade on inside information to think twice before taking such a misguided step...."

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