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2 arrested in massive insider trading case

Federal authorities say a stock trader and a lawyer, working with a middleman, made millions by using advance knowledge of mergers and acquisitions gleaned from the computers of prestigious New York law firms.

April 07, 2011|By David Sarno, Los Angeles Times
  • FBI Agent Michael Ward describes the insider trading case at a news conference in Newark, N.J. A chart shows the flow of information in the alleged scheme.
FBI Agent Michael Ward describes the insider trading case at a news conference… (Julio Cortez, AP )

With confidential information plundered from some of New York's most prestigious law firms, a corporate finance attorney, a Wall Street trader and a "middleman" bought hundreds of thousands of shares in companies about to be acquired, selling them when the deals were done to net millions of dollars in instant profit, federal officials allege.

After each haul — totaling at least $32 million over nearly 17 years, according to federal investigators — the men met in Atlantic City casinos, where they believed they could share their large cash spoils without attracting attention.

But on Wednesday, in one of the biggest insider trading cases to date, authorities arrested the lawyer and the trader. No charges have been filed against the unnamed middleman.

The two arrested men, Matthew H. Kluger, a Washington, D.C., attorney, and Garrett D. Bauer, a professional stock trader, have each been charged with more than a dozen counts of securities fraud, money laundering and obstruction of justice. They also face insider trading charges from the Securities and Exchange Commission.

"This was a brazen and deplorable scheme," said Daniel M. Hawke, chief of the SEC's financial markets investigations unit, in a statement.

In the criminal complaint, investigators said the men used data gleaned from law firm computers to make advance bets on huge mergers involving some of the technology world's best-known companies, including the former Sun Microsystems Inc., Oracle Corp. and Hewlett-Packard Co.

Investigators said the trio made most of their arrangements over pay phones and disposable cellphones, spread their proceeds over many bank accounts, and carted around hundreds of thousands of dollars in cash.

"The subjects in this case allegedly attempted to cover their tracks with tradecraft of which Gordon Gekko would have been proud," said FBI Special Agent in Charge Michael B. Ward, referring to the main character in "Wall Street," a movie about insider trading. "But in the end their downfall was similar: Criminal activity has been exposed, professional reputations tarnished, and in the end their own financial assets are the ones placed at risk."

The three New York law firms for which Kluger has worked since 1994 handle some of the corporate world's largest and most lucrative mergers and acquisitions. Investigators allege the trio hatched the scheme while Kluger was a summer intern at Cravath, Swaine & Moore. He later worked for Skadden, Arps, Slate, Meagher & Flom, and then Wilson Sonsini Goodrich & Rosati, where he and the others are alleged to have continued the scheme.

The law firms expressed regret that their confidentiality policies may not have been followed and said they were cooperating with authorities.

Lawyers at major firms oversee high-stakes deals of many kinds, and are entrusted by federal authorities to play by the rules, said Jacob Frenkel, a former prosecutor and SEC enforcement attorney now at Shulman Rogers.

"The SEC and [Justice Department] regard lawyers as a critical line of defense to ensure that this kind of wrongdoing does not take place," he said. "When that level of trust is violated, the government tends to approach these cases with a vengeance."

Authorities say Kluger realized early on that he could learn about impending merger deals by searching the firms' computer systems for related documents. But he was careful, they allege: Instead of actually opening the documents, which might have left a digital record, he only looked at their titles in the search results, scanning them for company names, according to the criminal complaint.

When Kluger discovered information about upcoming deals, the filings allege, he would call the middleman to tell him he had a lead. The middleman then allegedly bought disposable cellphones for the group so they could plan their trades and payouts on devices whose calls they thought could not be traced back to them. The trio allegedly used this system repeatedly, throwing away the phones when they were finished.

But the use of disposable and pay phones apparently didn't stop investigators from listening to and recording the group's telephone conversations, many of which are transcribed in a filing by the U.S. attorney of New Jersey. The transcripts indicate increasing anxiety, with talk of sleepless nights, attempts to recall any actions that might be incriminating, and appeals to not confess to authorities.

"There is a good chance they're eventually going to catch on," Bauer, the trader, allegedly says in one conversation. "But, like, if we all say nothing about each other — like, there, that is the only thing we can do. Like, that is the only way people get caught."

"Right," agreed the middleman, the filing says.

The middleman was not charged Wednesday in the filings by the SEC or federal law enforcement. Unnamed parties are often cooperating with the government — but are not necessarily exempt from criminal charges, said several people who have direct knowledge of the case but who were not authorized to speak publicly.

Bauer and Kluger face 14 criminal counts, most of which carry maximum penalties of 20 years in prison and a $500,000 fine per count. Attorneys for the men couldn't immediately be reached. Kluger did not respond to an email.

david.sarno@latimes.com

Times staff writer Nathaniel Popper contributed to this report.

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