May 27, 2024

DealBook: In Insider Case, a Long-Cold Trail Got Hot

Garrett Bauer in custody in a screen shot from CNBC. The trader is a crucial player in a long-term insider-trading case.CNBCGarrett Bauer, an accused trader, in custody in a screen shot from CNBC.

A decades-long insider trading scheme that was fed by a corporate lawyer who worked at some of the nation’s most prestigious law firms mysteriously came to a halt in 1999 before resuming five years later, the government has said.

The defendants were apparently worried in 1999 that investigators might be on their trail. While the government would not arrest them until more than a decade later, it was no idle fear: The trader who federal prosecutors say turned the lawyer’s tips into $32 million in illicit profits had been accused of insider trading by a brokerage firm that year.

A lawsuit brought by the TFM Investment Group contended that the trader, Garrett Bauer, armed with confidential information, bought loads of options on shares of First Brands just days before it was acquired by Clorox for about $1.8 billion.

Mr. Bauer netted some $350,000 from his trade, court documents say.

Though a judge later dismissed the lawsuit, its details were referred to the Securities and Exchange Commission, which spent years struggling to bring a case against Mr. Bauer, according to people briefed on the investigation.

The same obstacle stymied both the brokerage firm and the S.E.C. — neither could identify the source of Mr. Bauer’s information.

In announcing insider trading charges on Wednesday against Mr. Bauer and Matthew Kluger, the lawyer, federal prosecutors in New Jersey said that Mr. Bauer received his tips from Mr. Kluger. But he did so through an intermediary, whom investigators discovered only last month.

Had authorities known earlier, it might have been easier to identify a critical link back in 1999: the law firm that represented First Brands in the Clorox deal was Skadden, Arps, Slate, Meagher Flom, where Mr. Kluger worked as a deal lawyer. Authorities, however, have not accused Mr. Kluger of leaking information about that deal.

The unnamed intermediary was the linchpin of the government’s case, secretly recording conversations with both men and unraveling the 17-year operation between Mr. Bauer and Mr. Kluger, who otherwise scarcely had a relationship. The criminal complaint does not identify the intermediary, referring to him as only “Co-Conspirator 1.”

But according to public records and people close to the case, the intermediary was Kenneth T. Robinson, a former trader and mortgage broker on Long Island, who worked alongside both Mr. Bauer and Mr. Kluger early in their careers, establishing close personal friendships with them.

In addition to being a trusted friend to both, Mr. Robinson also offered a crucial buffer between the two men, whose care in covering their tracks appears to have masked the scheme for nearly two decades.

How the supposed scheme began — and how few warning flags it raised — is an indication of the care the men took to avoid detection, investigators have said.

Even among other recent insider trading cases brought by the government, which include hedge fund managers captured on wire taps, the case stands out for its attentiveness to caution: using disposable phones to conduct business, depositing small amounts of cash to avoid detection and threatening to burn piles of cash to rid the bills of fingerprints.

The two were so careful, prosecutors say, that they suspended their scheme for five years after the 1999 scare, waiting it out as the journeyman lawyer bounced from job to job and the trader took positions elsewhere, too. They rarely met, choosing instead to have Mr. Robinson shuttle the money and secrets that enriched all three.

Mr. Robinson, who is in his mid-40s, knew both men from an earlier time. He was employed at a Manhattan real estate company with Mr. Kluger around 1991, and worked alongside Mr. Bauer at the venture capital firm Weiss, Peck Greer shortly thereafter.

Shortly after leaving Weiss, Peck Greer, Mr. Robinson joined Dean Witter in 1996. He was dismissed from that position the following year because he was “unable to perform at acceptable standard for his position,” according to regulatory filings.

The arrangement among the three men, according to the government, was simple but discrete: Mr. Kluger, 50, would pass information about deals that he or his firm worked on to Mr. Robinson, who passed the information to Mr. Bauer, 43. When the trades were done, Mr. Bauer handed thousands in cash to Mr. Robinson, who passed a cut along to Mr. Kluger.

But they made one critical mistake: Mr. Robinson, the longtime middleman, began to trade on those tips himself in the fall of 2009, the criminal complaint says. That led to the downfall of the entire scheme.

In October 2009, Mr. Robinson began buying shares in the 3Com Corporation, which was soon to be acquired by Hewlett-Packard, reaping nearly $200,000 in profits, according to the government. But the gains also alerted the S.E.C. to Mr. Robinson, according to a person with knowledge of the investigation who spoke anonymously because its details are not public.

In early March, federal authorities raided Mr. Robinson’s home in Long Beach, N.Y. One neighbor said on Friday that the search seemed low key, suggesting the agents could have been mistaken for construction workers.

By March 17, Mr. Robinson began recording calls with his friends. Even in these secretly recorded conversations, the lawyer, Mr. Kluger, reflected on how careful the three had been.

“And I don’t think that with what they have, they can go to court and prove stuff beyond a reasonable doubt,” he said in a conversation cited in the complaint. “It may come to the point where they realize that they don’t really have much of anything.”

Mr. Kluger began his career at Cravath, Swaine Moore after graduating from New York University Law School in 1995. Mr. Kluger, a transfer student from the law school at Brooklyn College, was not remembered by many classmates.

He was recalled as relatively quiet in class. But many knew of his father’s fame as a social historian. Richard Kluger, 76, is best known for his book “Ashes to Ashes,” which chronicled the history of the tobacco industry in America and won him the Pulitzer Prize.

Reached by phone Friday, the elder Mr. Kluger said his family was shocked by the accusations, but declined to comment further.

At a brief hearing in the United States District Court in Alexandria, Va., on Friday, Mr. Kluger appeared in a dark green jumpsuit alongside a federal public defender. He will be transferred to New Jersey. Mr. Bauer is scheduled to appear in the United States District Court in Newark on Monday.

During the short appearance before the judge, the public defender noted that Mr. Kluger, a longtime corporate lawyer, was “not necessarily entitled to a court-appointed counsel.”

Mr. Kluger has not asked for bail, and will remain in detention.

After nearly two decades of working for prestigious law firms, the arrest has been a precipitous fall for Mr. Kluger. In addition to Skadden and Cravath, Mr. Kluger worked for the Silicon Valley powerhouse Wilson Sonsini Goodrich Rosati. He also worked for the law firm Fried Frank, and in 2002 sued the firm, contending that he had been discriminated against because he was gay.

Nearly three weeks after Mr. Robinson began taping his two friends, federal authorities arrested both men at their homes on Wednesday.

Recordings cited in the complaint tell how the men tried in the last days to thwart authorities by destroying a computer and cellphones and considering whether to burn cash.

The neighbor of Mr. Robinson described him as a family man. Brightly colored toys were strewn across the backyard of the home.

“He was one of the nicest guys I know,” said Paul, a neighbor who declined to give his last name. “Ken is American pie.”

Mr. Robinson was unavailable for comment, but an elderly woman at his home declined to comment before slamming the door of the two-story stucco home.

Evelyn M. Rusli and Elizabeth Olson contributed reporting.

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