A corporate lawyer and a trader were charged Wednesday with running a 17-year conspiracy to trade on corporate merger secrets stolen from three of the nation's most prominent law firms, in one of the largest U.S. insider trading cases on record.
Matthew H. Kluger, who until last month was a lawyer at Wilson Sonsini Goodrich & Rosati PC, and the trader Garrett D. Bauer were accused of reaping more than $32.2 million of illicit profit by trading on tips about upcoming mergers and acquisitions.
In a complaint filed with the federal court in Newark, New Jersey, prosecutors said Kluger, 50, passed tips to an unnamed co-conspirator about mergers such as Oracle Corp.'s takeover of Sun Microsystems Inc. and Adobe Systems Inc.'s takeover of Omniture Inc.
The co-conspirator would then tip Bauer, 43, who would make trades for all three of them based on the inside information, prosecutors said. Kluger also passed tips from his earlier jobs at Cravath Swaine & Moore LLP and Skadden, Arps, Slate, Meagher & Flom LLP, they added.
"According to the complaint, the defendants exploited Kluger's access to sensitive, confidential information to make trading profits a sure thing," U.S. Attorney Paul Fishman in New Jersey said. "This kind of cheating corrodes confidence in our markets and swindles those who play by the rules."
Bauer worked at a variety of trading firms, including at Lighthouse Financial Group from about June 2009 to August 2010, prosecutors said.
Kluger lives in Oakton, Virginia, while Bauer lives in New York. The U.S. Securities and Exchange Commission filed related civil charges against the men.
"It's just shocking," said Garrett Moran, chief operating officer of the private equity group at Blackstone Group LP, at the Reuters Global Mergers and Acquisitions Summit. "We all have very, very careful procedures. You just don't do a trade unless you ask your compliance department in advance."
Kluger is expected to appear in a federal court in Alexandria, Virginia, while Bauer is expected to appear in the Newark court. It is unclear whether they have retained lawyers. Neither could be reached for comment.
The insider trading case is one of the largest in U.S. history based on the amount of illegal profit, a sum that could grow as investigators probe further, said a person familiar with the case who was not authorized to talk publicly.
Kluger's and Bauer's arrests follow dozens of other insider trading arrests since October 2009, which have been made in connection with what prosecutors have called the biggest hedge fund insider trading probe ever.
One-time billionaire Raj Rajaratnam, who founded the hedge fund firm Galleon Group, is on trial in Manhattan in Wall Street's biggest insider trading case in two decades, accused of reaping $45 million of illicit profit.
Investigators said Kluger and Bauer originally hatched their plan at an Atlantic City, New Jersey, meeting, in which Bauer agreed to use gambling as a cover story to explain cash withdrawals he was making to funnel illegal profits to Kluger.
They also said that after the FBI searched the co-conspirator's home on March 8, Kluger and Bauer — sometimes called "Mr. G" — became nervous, and began destroying cellphones, computer records and other evidence.
"As long as Mr. G keeps his mouth shut and I keep mine and you keep yours, I don't think they're gonna find enough of anything," the government quoted Kluger as saying on a March 17, 2011, cellphone call with the co-conspirator.
Prosecutors also said Bauer in late 2009 spent roughly $7.5 million of proceeds from the scheme to buy two homes: a $6.65 million condominium on Manhattan's Upper East Side, and an $875,000 home in Boca Raton, Florida.
Kluger and Bauer were charged in a 17-count criminal complaint, including 11 counts of insider trading, four counts of obstruction of justice, conspiracy to commit insider trading, and conspiracy to commit money laundering.
According to court papers, Kluger and Bauer invested more than $109 million in the scheme, which involved trades dating as far back as Johnson & Johnson's 1994 takeover of Neutrogena Corp. and International Business Machines Corp.'s takeover of Lotus Development Corp. the next year.
Skadden spokesman Brendan Intindola said: "We have strict policies that protect our clients' confidential information, which we monitor closely. It would be deeply disappointing if these policies were not followed in this instance. We are cooperating fully with the government in this matter."
Wilson Sonsini did not immediately return requests for a comment. A Cravath spokeswoman had no immediate comment.
According to the complaint, Kluger worked from December 2005 until this March 11 as a senior associate in Wilson Sonsini's office in Washington, D.C., where his annual salary was about $290,000.
Kluger worked at Cravath from 1994 to 1997, and at Skadden from 1998 to 2001, the complaint said. According to his New York attorney registration, Kluger now works at a Fairfax, Virginia, entity called TSX that is involved in providing safety-related services.
Prosecutors said Bauer worked at a few trading firms.
His onetime employer Lighthouse also once employed broker Michael Kimelman, who was arrested in 2009 in connection with the hedge fund insider trading probe. Kimelman has been represented in that case by Wilson Sonsini lawyers.
The case is U.S. v. Bauer et al, U.S. District Court, District of New Jersey, No. 11-mag-03536.
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