Big Law Needs New Insider Trading Rules to Deter Future Scandals

The recent insider trading scheme involving Big Law associates provides a clear example of the porous nature of the rules surrounding attorneys who have near-constant access to their clients’ material nonpublic information.

It raises the question about whether law firms should institute a compliance system that would provide an affirmative defense to insider trading.

In the case involving Nicolo Nourafchan—who worked at Sidley Austin, Latham & Watkins, and Goodwin Procter—prosecutors detailed a decade-long operation in which deal information was siphoned and monetized through trading, sometimes with access to files on which Nourafchan wasn’t even staffed.

The firms’ clients are victims, given that their confidential information entrusted to their attorneys was used for illegal gain. The law firms themselves are also victims, and they may suffer reputational and pecuniary damages.

Despite this possible victimization, the scandal is still a black eye on the profession because it reveals how much firms have relied on trust and professional norms rather than rigorous compliance systems.

Insider trading by lawyers isn’t a new phenomenon. Law firms deal with material nonpublic information every day. In many ways, they are structurally positioned to generate the very informational asymmetries that insider trading law is trying to police.

The misappropriation theory, on which this most recent scandal is based, stems from a case involving a partner at a law firm trading on information related to an upcoming merger in which his firm was providing counsel. Yet with the advent of prediction markets platforms such as Polymarket and Kalshi, and the proliferation of different ways of trading, detecting attorneys’ misconduct is getting increasingly difficult.

The Securities and Exchange Commission’s embrace of “shadow trading”—trading in one company’s securities based on information about another—also pushes insider trading liability beyond traditional boundaries.

If information about Client A can make trading in Company B unlawful because the companies are “economically linked,” the compliance problem for law firms becomes exponentially more complex. The universe of companies on the “don’t trade” list is no longer just the firm’s client; it also includes the client’s competitors, partners, and suppliers.

To combat these issues, law firms should seriously consider enacting something like a Rule 10b5-1 plan. Rule 10b5-1, which was designed for corporate insiders, allows trades to be pre-scheduled—entered into in good faith, before the trader possesses material nonpublic information, and executed without subsequent discretion. The premise is straightforward: If the trade was predetermined, it isn’t opportunistic.

In my recent work, I argued that these plans should be extended to cover “peer” or economically linked firms in light of shadow trading, not just a firm’s own securities. That insight translates cleanly—and perhaps even more urgently—to law firms.

Consider, for example, the typical mergers and acquisitions associate at a large firm. While working on a merger, they learn information that is plainly material to the target and the acquirer. But it is also likely material to competitors, industry peers, and even adjacent sectors. Under a shadow trading theory, trading in any of those securities could raise liability concerns.

If the firm enacted a compliance system to bar trading in any of those companies, this would result in something both overbroad (because everything theoretically is off-limits) and underdetermined (because no one can say with confidence where the boundaries lie). But this is exactly the kind of uncertainty Rule 10b5-1 was designed to eliminate.

Such plans would do something current compliance systems don’t: They would give lawyers a clear, defensible pathway to participate in markets without constantly navigating gray areas. Instead of asking whether a particular trade might be problematic given overlapping information flows, the inquiry would be simpler: Was the trade executed pursuant to a pre-established plan?

This matters more than it might seem. One of the central problems in insider trading enforcement is the gap between doctrinal complexity and real-world decision-making. Lawyers understand the law in the abstract. But when faced with a trading decision months after working on a deal, with only partial recollection of what information they possessed and when, the analysis becomes murky. A structured trading plan eliminates that ambiguity.

There are also institutional benefits. Pre-scheduled trading would reduce the need for intrusive monitoring, lower the risk of inadvertent violations, and provide firms with a stronger defense if misconduct is alleged. It would shift compliance from reactive policing to proactive design.

But there are limits—and they aren’t trivial.

First, law firms aren’t corporations. Their lawyers aren’t trading in “company stock,” but in a broad universe of securities. Designing plans that meaningfully constrain trading without being overly restrictive would be difficult.

Second, the shadow trading problem cuts in precisely the wrong direction. If liability can attach based on “economically linked firms,” then a robust Rule 10b5-1–style plan might need to account for an ever-expanding set of securities. At some point, the plan becomes either unworkably complex or so narrow that it effectively bars meaningful trading.

There is also a deeper conceptual concern. Rule 10b5-1 works because it assumes the relevant information set is bounded. Corporate insiders know which company’s stock they are trading in.

Law firm lawyers, by contrast, are exposed to information across clients, industries, and time horizons. The informational baseline is far more diffuse. A plan that is compliant when adopted may still sit uneasily with the spirit of insider trading law months later.

The alternative isn’t particularly attractive, though. The current system relies heavily on after-the-fact enforcement and increasingly expansive theories of liability. It asks lawyers to navigate a doctrinal landscape that is, by any measure, unstable—one in which even the definition of “inside information” is evolving.

For law firms, that means confronting a question they have largely avoided: whether trust and professional norms are sufficient in an environment where information is both more valuable and more portable than ever.

A Rule 10b5-1–style system for lawyers may not be the perfect solution, but it takes seriously the idea that compliance must be designed rather than assumed. And after the recent scandal’s wake-up call to many white-shoe law firms, that is a premise law firms can no longer afford to ignore.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Karen Woody is a professor at Washington & Lee University School of Law and is a recognized expert and scholar in securities and white collar crime.

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