How a Brazilian Lawyer Got Busted for Insider Trading in the U.S.
Insider trading is a serious crime that can result in hefty fines and prison sentences. It involves trading on material information that is not available to the public, and that gives an unfair advantage to the trader. Insider trading can also harm the integrity and efficiency of the securities markets, and erode the trust of investors.
In this blog post, we will look at a recent case of insider trading that involved a Brazilian lawyer who worked at a U.S.-based global law firm. We will examine how he obtained and used confidential information from the law firm's document management system, and how he was caught and charged by the U.S. authorities.
Who is Romero Cabral da Costa Neto?
Romero Cabral da Costa Neto is a Brazilian attorney who worked as a visiting international attorney at a U.S.-based global law firm (the Law Firm) from September 2022 to August 2023. He was part of the Law Firm's Latin America practice group, and was based in Washington, D.C.
According to his LinkedIn profile, he graduated from the University of São Paulo Law School in 2018, and obtained a Master of Laws degree from Harvard Law School in 2020. He also worked as an associate at a Brazilian law firm before joining the Law Firm.
How did he access confidential information?
The Law Firm represented several clients in various transactions that involved material announcements relating to those entities. These transactions included mergers and acquisitions, securities offerings, regulatory filings, and litigation matters.
The Law Firm used a document management system (DMS) to store and share documents related to these transactions among its attorneys and staff. The DMS allowed users to access and view documents based on their roles and permissions.
Cabral was not assigned to any of the transactions he traded on, and had no legitimate reason to access and view the confidential files related to those matters. However, he was able to exploit a vulnerability in the DMS that allowed him to bypass the security controls and access documents that he was not authorized to see.
He accessed and viewed hundreds of documents containing material nonpublic information about the transactions he traded on, including draft SEC filings, press releases, due diligence reports, deal memos, engagement letters, and other sensitive documents.
He accessed these documents from his work computer at the Law Firm's office, as well as from his personal laptop and smartphone using the Law Firm's VPN connection. He also used his personal email account to send himself links to some of the documents he accessed.
How did he trade on the confidential information?
Cabral traded in the securities of several Law Firm clients close in time to material announcements relating to those entities, generating over $42,000 in illicit profits. He used an online brokerage account that he opened in his own name in September 2022, shortly after joining the Law Firm.
One of his trades involved CTI BioPharma Corp. (CTI), a biotech company that was acquired by Swedish Orphan Biovitrum AB (Sobi) on May 10, 2023 for $1.7 billion. He purchased 10,400 shares of CTI on May 9, 2023 for $4.05 per share, and sold them on May 10, 2023 for $8.10 per share after the acquisition was announced, making a one-day profit of over $42,000.
He accessed and viewed several documents containing material nonpublic information about the acquisition prior to his trades, including:
- A draft Form S-4 registration statement filed by Sobi with the SEC on April 28, 2023.
- A draft press release announcing the acquisition dated May 9, 2023.
- A draft Form 8-K filed by CTI with the SEC on May 10, 2023.
- A deal memo summarizing the terms of the acquisition dated May 10, 2023.
He also traded on confidential information relating to other Law Firm clients, such as:
- A pharmaceutical company that announced positive results from a clinical trial on June 15, 2023.
- A biotech company that announced a licensing agreement with another company on July 12, 2023.
- A medical device company that announced a merger with another company on August 2, 2023.
How was he caught and charged?
Cabral's trading activity raised red flags at both his brokerage firm and the Law Firm. His brokerage firm reported his suspicious trades to FINRA (Financial Industry Regulatory Authority), which in turn alerted the SEC (Securities and Exchange Commission).
The SEC conducted an investigation into Cabral's trading activity and obtained records from his brokerage firm, his email provider, his internet service provider, and the Law Firm. The SEC also interviewed Cabral and other witnesses.
The SEC found that Cabral's trades were based on material nonpublic information that he obtained from the Law Firm's DMS, and that he breached a duty to the Law Firm and its clients, and violated the Law Firm's policies, including its policy against insider trading.
The SEC filed a civil complaint against Cabral on August 22, 2023 in the U.S. District Court for the District of Columbia, charging him with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC sought a permanent injunction, disgorgement of ill-gotten gains plus interest, civil penalties, and a bar from serving as an officer or director of any public company.
On the same day, the FBI arrested Cabral in Washington, D.C. and the DOJ (Department of Justice) filed a criminal complaint against him in the same court, charging him with the same violations. The DOJ sought a maximum sentence of 20 years in prison and a fine of up to $5 million.
Cabral appeared before a magistrate judge on August 23, 2023 and was released on a $100,000 bond. He was ordered to surrender his passport and not to leave the U.S. pending trial.
What are the implications of this case?
This case illustrates the serious consequences of insider trading, and the efforts of the U.S. authorities to detect and prosecute such conduct. It also shows that insider trading can occur not only by corporate insiders, but also by outsiders who have access to confidential information through their professional or personal relationships.
This case also highlights the importance of having robust cybersecurity measures and policies to protect sensitive information from unauthorized access and misuse. The Law Firm has since fixed the vulnerability in its DMS and enhanced its security protocols and training.
As for Cabral, he faces a potential prison term and a hefty fine if convicted. He also faces disciplinary action from his professional associations and possible civil lawsuits from the Law Firm and its clients. His career as a lawyer is likely over.
