A Hard Drive, an Ex-Wife, and $1 Million

I recently came across the story about Karen Zilkha and how she was rewarded $1 million from the SEC for handing over a hard drive with emails on it. This story could easily pass for a compelling Lifetime made-for-TV movie, but underneath the drama is an important message.

Back in 2001, David Zilkha went to work for Pequot Capital Management. He was previously employed by Microsoft. According to the SEC, David Zilkha tipped the firm and Pequot founder Arthur Samberg about Microsoft’s earnings.

The SEC contended that Samburg traded using this information, and it tried (and failed) to bring a case a few years ago.

Enter Karen Zilkha, 2009.

The SEC received a computer hard drive from Karen, who had been involved in a particularly nasty divorce proceeding with David Zilkha. After reviewing the content of the hard drive, emails were discovered that allowed the SEC to reopen their case. And as a result, the SEC charged Pequot Capital and Samburg with insider trading for trading on non-public information related to Microsoft.

The emails discovered on the hard drive included direct communication with a former colleague at Microsoft concerning the company’s earnings. These emails were not produced despite subpoenas requiring David Zilkha to disclose all related communication. Pequot and Samberg agreed to pay nearly $28 million as part of the settlement.

What’s the lesson from all of this?

It always goes back to email. Communication through email is more often than not the proverbial “smoking gun.” Not just in this case, but in countless others, both in business and in private or civil situations. The viral nature of email makes it difficult to stifle – there are multiple copies created (start with the receiver’s server as well as the sender’s). To borrow the sports cliché, “you can not stop email, you can only hope to contain it.”

Now I can’t say with any certainty that the penalties eight years later are more severe than they would have been in 2001. From where I sit though, it makes far more sense to archive and monitor email and know what you’re up against than to count on email disappearing completely.

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