Criminal Justice News

Wednesday, June 06, 2012

Lawyer Gets Record Prison Sentenced of 12 Years in Insider Trading Scheme That Used Information Stolen from Preeminent Law Firms

Stock Trader with Whom He Worked Gets Nine Years; Pair Traded Ahead of More Than 30 Different Corporate Transactions, Netted $37 Million in Profits

NEWARK—The lawyer who fed inside information to a professional stock trader in a 17-year scheme that netted them millions today received the longest sentence ever meted out in an insider trading case—12 years in prison, U.S. Attorney Paul J. Fishman announced.

Attorney Matthew Kluger, 51, of Oakton, Virginia, was sentenced to 144 months in prison by U.S. District Judge Katharine S. Hayden in Newark federal court. Stock trader Garrett D. Bauer, 44, of New York, was sentenced to 108 months in prison. Both had previously pleaded guilty before Judge Hayden to informations charging them with conspiracy to commit securities fraud, securities fraud, conspiracy to commit money laundering, and obstruction of justice.

“The severe sentences imposed today are a warning to anyone trying to game the financial markets for their own enrichment,” U.S. Attorney Fishman said. “Garrett Bauer and Matthew Kluger participated in one of the longest-running insider trading schemes ever prosecuted. Bauer traded on confidential information that Kluger obtained from his position of trust at major law firms and parlayed it into tens of millions of dollars in illicit profits. Today, both of them reap the punishment their conduct deserves.”
“Millions of investors have entrusted their life savings to the integrity of financial markets and the belief of a level playing field,” said Michael B. Ward, Special Agent In Charge of the Newark Division of the FBI. “Insider trading corrupts the process and tilts the playing field in favor of those privileged few with access to information not available to the public and at the expense of unsuspecting and unknowing investors. It is important that those who manipulate that trust be held accountable in strictest accordance with the law.”

According to documents filed in this case and statements made in court:

Bauer and two coconspirators—Kluger and Kenneth Robinson, 45, of Long Beach, New York—engaged in an insider trading scheme that began in 1994 and relied on Kluger, a lawyer, to steal information from his employers and their clients.

Bauer admitted that as part of the scheme, he traded ahead of more than 30 different corporate transactions based on inside information provided by Kluger.

Over time, Kluger worked at four of the nation’s premier mergers and acquisitions law firms. From 1994 to 1997, he worked first as a summer associate and later as a corporate associate at Cravath Swaine & Moore in New York. From 1998 to 2001, he worked at Skadden, Arps, Slate, Meagher & Flom in New York and Palo Alto, California as an associate in their corporate department. From 2001 to 2002, Kluger worked as a corporate associate at Fried, Frank, Harris, Shriver & Jacobson LLP in New York. From December 5, 2005 to March 11, 2011, Kluger worked at Wilson Sonsini Goodrich & Rosati (“Wilson Sonsini”) as a senior associate in the Mergers & Acquisitions Department of the firm’s Washington Office.

While at the firms, Kluger regularly stole and disclosed to Robinson material, non-public information regarding anticipated corporate mergers and acquisitions on which his firms were working. Early in the scheme, Kluger disclosed information relating to deals on which he personally worked. As the scheme developed, and in an effort to avoid law enforcement detection, Kluger took information that he found primarily by viewing documents on his firms’ computer systems.

Once Kluger provided the inside information to Robinson, Robinson passed it to Bauer, who then purchased shares for himself, Kluger, and Robinson in Bauer’s trading accounts. He sold the shares once the relevant deal was publicly announced and the stock price rose. Bauer gave Robinson and Kluger their shares of the illicit profits in cash—often tens or hundreds of thousands of dollars—that Bauer withdrew in multiple transactions from ATMs.

Bauer spent more than $7 million of his share of the proceeds to purchase two properties—approximately $6.65 million for an Upper East Side condominium in New York and approximately $875,000 for a home in Boca Raton, Florida.

Bauer admitted that after Kluger joined Wilson Sonsini, the three conspirators took greater efforts to prevent detection of their insider trading scheme. Among other techniques, they used pay phones and prepaid cellular phones that they referred to as “throwaway phones” to discuss the scheme.

Bauer also admitted that after Robinson told him that the FBI and IRS had searched Robinson’s house and had asked questions about the illicit scheme, Bauer destroyed a prepaid phone, discarding the pieces in two separate trash cans at a New York McDonald’s restaurant. Bauer also admitted to directing Robinson to burn approximately $175,000 in cash that Bauer had paid him out of concern his fingerprints would be found on the money.

In addition to the prison term, Bauer and Kluger were both sentenced to three years’ supervised release. As part of his guilty plea, Bauer also agreed to forfeit the contents of numerous trading and bank accounts he used to facilitate the scheme, as well as homes that he purchased with the proceeds. In total, the value of the property Bauer is required to forfeit is $21 million. Kluger agreed to forfeit $415,000.

Robinson pleaded guilty on April 11, 2011 to an information charging him with one count of conspiracy to commit securities fraud and two counts of securities fraud and is scheduled to be sentenced before Judge Hayden tomorrow, June 5, 2012.

U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Ward in Newark; and special agents of the IRS, under the direction of Acting Special Agent in Charge JoAnn S. Zuniga, for the investigation leading to today’s sentencings. He also thanked the U.S. Securities and Exchange Commission’s Market Abuse Unit and Philadelphia Regional Office, under the direction of Daniel M. Hawke, for their role in the investigation.

The government is represented by Assistant U.S. Attorneys Matthew E. Beck of the U.S. Attorney’s Office Economic Crimes Unit; Judith H. Germano, Chief of the Economic Crimes Unit; and Lakshmi Srinivasan Herman of the Office’s Asset Forfeiture Unit in Newark.

This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch and, with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

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