April 17, 2024

DealBook: Deal Lawyer Accused of Insider Trading Scheme

Paul Fishman, United States attorney for New Jersey, announces the insider trading arrests.Matt Rainey for The New York TimesPaul Fishman, United States attorney, discusses the charges.

8:55 p.m. | Updated

As a lawyer at three of the most prestigious merger and acquisition law firms in the country, Matthew Kluger stood at the center of the deal-making universe for nearly two decades.

Now, he stands accused of using his position to run an insider-trading scheme that earned more than $32 million. The reported plot relied on tactics ripped from a television drama, including disposable cellphones, code names and a plan to burn $175,000.

On Wednesday, federal prosecutors in New Jersey charged Mr. Kluger with stealing private information about pending deals from his law firm, the Silicon Valley powerhouse of Wilson Sonsini Goodrich Rosati, and sharing it with Garrett Bauer, a trader, who was also charged. Mr. Bauer, according to the government, used the insider tidbits to buy the stocks of companies involved in the deals. Prosecutors also charged the men with trying to hide their actions by ditching cellphones and destroying a computer and an iPhone.

“It amounts to nothing short of a highly organized criminal enterprise designed and carried out by industry professionals and fueled by intense greed,” said Daniel M. Hawke, market abuse enforcement chief of the Securities and Exchange Commission, which brought a civil complaint against the two men as well. “It was not an opportunistic act but a deliberate deed.”

Calls seeking comment from Mr. Bauer’s lawyer were not returned. Attempts to reach Mr. Kluger’s lawyer were unsuccessful. Judges in Virginia, where Mr. Kluger lives, and New Jersey ordered the men detained until a hearing on Friday.

The case comes amid a sweeping federal crackdown on insider trading that is playing out on multiple fronts. The biggest insider-trading trial in a generation, now under way in Manhattan, has zeroed in on a hedge fund manager accused of netting millions of dollars by trading on inside information. At the same time, the government has stepped up its examination of so-called expert networks, in which matchmakers connect hedge funds with the employees of public companies and other industry experts.

“There certainly seems to be a huge uptick in our discovery” of insider trading, Paul Fishman, the United States attorney for New Jersey, said Wednesday at a news conference in Newark. “Insider trading has real consequences for the markets and investors, and today it has real consequences for people who try it.”

The two men who arrested on Wednesday were charged only with trades made in the last five years, when Mr. Kluger worked in the Washington offices of Wilson Sonsini. But prosecutors say the plan dates back to the 1990s, when Mr. Kluger was a lawyer at two of the biggest Wall Street law firms, Cravath Swaine Moore and Skadden, Arps, Slate, Meagher Flom.

Underpinning the government’s case are secret recordings it said were obtained by a longtime middleman and close friend of both Mr. Kluger, 50, and Mr. Bauer, 43. The government did not identify the man by name, but it said he was a resident of Long Beach, N.Y., and a mortgage industry professional. After years of carrying money and intelligence between the two men, the anonymous co-conspirator began taping conversations with the men, according to the complaint.

As recently as two weeks ago, according to an excerpt of one such conversation, Mr. Bauer sounded an alarm as he felt the government inching closer: “I mean, the fact is we did something wrong.”

The scheme, prosecutors say, began not long after Mr. Kluger, while a law student at New York University, landed a job as a summer associate with Cravath in 1994. He began to funnel information about pending deals, like Johnson Johnson’s $924 million acquisition of Neutrogena, to his friend, the co-conspirator, according to the complaint. The co-conspirator got Mr. Bauer, a professional stock trader, to buy and sell shares in the companies Mr. Kluger leaked information about, the complaint says.

In 1995, Cravath was embroiled in a separate insider trading case when one of its lawyers pleaded guilty to leaking information about pending deals to his brother. At the time, the S.E.C. said it was conducting the most sweeping insider-trading inquiries since the 1980s takeover boom.

Mr. Kluger’s case bridges the 1990s era of insider trading with the current one as it spans 17 years and more than 15 stocks.

Wilson Sonsini, Cravath and Skadden are cooperating in the investigation, authorities said.

Even as Mr. Kluger hopped from law firm to law firm, the basic operation remained the same, prosecutors say. After executing profitable trades, Mr. Bauer would pull tens, sometimes hundreds, of thousands of dollars from many A.T.M.’s across Manhattan and hand the cash over to the unnamed co-conspirator. Mr. Kluger would then meet up with the co-conspirator to collect his winnings.

Most of the profits were pocketed by Mr. Bauer, who bought a $6.7 million home on the Upper East Side of Manhattan and an $875,000 home in Boca Raton, Fla., prosecutors say.

According to the criminal complaint, Mr. Kluger’s scheme grew bolder over the years. At first, he merely tipped his friend on deals he worked on directly. But by the time he landed at Wilson, Mr. Kluger was sneaking into the firm’s databases to glean non-public information about possible deals, the complaint says.

The most profitable action took place in April 2009, when Mr. Kluger tapped the computer system to gather information about Oracle’s proposed bid for Sun Microsystems, the complaint says. Shortly thereafter, Mr. Bauer bought more than four million shares of Sun Micro, according to the complaint. The deal closed in early 2010, and the group made a windfall of more than $11 million, the complaint says.

The complaint describes ways the men tried to cover their tracks: early on, Mr. Bauer and the unnamed co-conspirator went to Atlantic City to create an alibi for the cash Mr. Bauer was pulling from his accounts.

The men began using prepaid cellphones to avoid wire taps, often dumping them once a deal was done. Mr. Kluger and the unnamed co-conspirator deposited small money in their accounts, typically less than $10,000, so as not to arouse suspicion. Mr. Kluger referred to Mr. Bauer as “Mr. G.” The unnamed co-conspirator stowed some of his cash away in safety deposit boxes.

In spite of their efforts, the S.E.C. and the Financial Industry Regulatory Authority noticed trading irregularities as early as 2007, according to people close to the investigation who did not want to be identified because the case was continuing and the information was not public.

In early March, the Federal Bureau of Investigation searched the unnamed co-conspirator’s home, apparently sending the group into a panic. Shortly after, the co-conspirator started recording conversations with his counterparts, the complaint says.

In one exchange cited in the complaint, Mr. Bauer details the steps he went through to avoid detection. He tells the unnamed co-conspirator he went to a nearby McDonald’s to dispose of a cellphone in two different garbage cans. Then he noticed someone watching him.

“I thought it was an F.B.I. agent,” he said. “And I asked him, ‘Do you know me? You look familiar.’ And, like, I was so panicked.”

In another conversation cited in the complaint, on March 17, Mr. Kluger told his friend about a feared investigation: “It’s going to kill them that they don’t have enough.” Later, he adds: “They don’t like to go to court without phone calls.”

The next day, in another recorded phone call, Mr. Bauer told the unnamed co-conspirator to burn a pile of cash that had his fingerprints on it and said, if questioned about his large A.T.M. withdrawals, he would claim he had “bought prostitutes” with it. As an alternative to rid the cash of fingerprints, the men discussed running it through a washing machine.

Mr. Bauer promised to remain loyal to his friend, in a recording cited in the complaint. “I know 100 percent in my mind, no matter what happens, I will never mention you” to the government, he said.

U.S. v. Bauer and Kluger

S.E.C. v. Kluger and Bauer

Article source: http://feeds.nytimes.com/click.phdo?i=d88b42ce431a0fb74f0480057af6c582

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