As part of my “scared straight” strategy for teaching insider trading, I like to tell my students horror stories of attorneys who have been caught up in scandals (as well as the collective *facepalm* reaction of the bar, which is as much due to the stupidity of the schemes as to their immorality).

Last year, I recounted the curious case of Robert Schulman and King Pharmaceuticals.

Schulman was an attorney representing King Pharmaceuticals, and he learned that the company would soon be acquired by Pfizer.  He told his friend and investment adviser, Tibor Klein, who promptly purchased King shares for himself and his clients (some of which were allocated to Schulman’s account).  All told, Klein generated about $328K in profits.

The SEC charged Klein with insider trading in 2013.  Interestingly, the SEC did not accuse Schulman of tipping; instead, the SEC’s theory was that Schulman had gotten tipsy at dinner and shot off at the mouth, ultimately blurting out, “It would be nice to be King for a day.”  (When I tell my students this part, I imagine how that might have been said – presumably, with an exaggerated  wink and heavy emphasis on the word “King”).  Klein, having been given the information in confidence, wronged Schulman by misappropriating it for his own use. 

Except it seemed to me that the SEC never really believed Schulman’s claim that he had never intended to tip his friend.  Why?  Because most of the time, when the SEC files a complaint that involves nonparties, the SEC is careful to conceal their names.  (For example)  If necessary, the SEC might describe them as Person A or Witness B, that kind of thing.

But not in the King case.  There, the SEC could not have been more forthcoming with Schulman’s name, which it repeated ad nauseam throughout the complaint – along with the potentially career-destroying details of his drunkenness, and his desire to impress his friend as a “big shot.”  So it always struck me that the subtext here was, if the SEC couldn’t prove that Schulman intended to tip his friend, by god, it was going to embarrass him as much as it could.

Well, it took another three years, but the SEC has finally gotten its man, in a way: the Brooklyn US Attorney has charged both Schulman and Klein with criminal insider trading, with potential penalties of up to 20 years in prison.  

King for a day, under a sword of Damocles.