United States Attorney
District of New Jersey
APRIL 06, 2011
Attorney and Trader Arrested, Charged in New Jersey with Trading on Inside Information Stolen from Three Law Firms
More than $109 Million in Illegally Traded Shares Netted More than $32 Million in Last Five Years of Decades-Long Scheme
NEWARK, N.J. – A professional stock trader and an attorney who formerly worked as a corporate associate at three prominent, international law firms were arrested today on charges arising from their alleged participation in a long-term insider trading scheme that netted at least $32 million in illicit profits, announced New Jersey U.S. Attorney Paul J. Fishman.
Garrett D. Bauer, 43, of New York, and Matthew H. Kluger, 50, of Oakton, Va., are both charged in a criminal complaint with one count of conspiracy to commit securities fraud, one count of conspiracy to commit money laundering and two counts each of obstruction of justice. Bauer and Kluger are also each charged with nine counts and 11 counts of securities fraud, respectively. Both men were arrested this morning at their residences by FBI and Internal Revenue Service (IRS) agents. Bauer appeared this afternoon before U.S. Magistrate Judge Mark Falk in Newark federal court. Kluger appeared this afternoon before U.S. Magistrate Judge Theresa Carroll Buchanan in Alexandria, Va., federal court.
The complaint also seeks the forfeiture of over $32 million, Bauer’s real property in New York and Boca Raton, and the contents of a number of bank and trading accounts allegedly used to facilitate the scheme.
“According to the complaint, the defendants exploited Kluger’s access to sensitive, confidential information to make trading profits a sure thing. This kind of cheating corrodes confidence in our markets and swindles those who play by the rules,” said U.S. Attorney Fishman. “A hub of corporate headquarters, technological expertise and infrastructure, New Jersey houses the wiring of Wall Street and some of the biggest names in industry. Despite Bauer and Kluger’s attempts to thwart law enforcement, our coordinated work has ensured they will not get away with committing fraud in our backyard.”
“The impact of crimes commonly referred to as ‘insider trading’ is unmistakable. Millions of investors have entrusted their life savings to the integrity of the financial markets and the belief of a level playing field,” stated FBI Special Agent in Charge Michael B. Ward. “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. The subjects in this case allegedly attempted to cover their tracks with tradecraft of which Gordon Gecko would have been proud, 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.”
According to the complaint unsealed today:
Bauer, Kluger, and an unnamed co-conspirator engaged in an insider trading scheme that began in 1994. During the last five years, the conspirators invested more than $109 million and made more than approximately $32 million in illicit profits.
Throughout his career, Kluger worked at three 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 as an associate in their corporate department. From December 2005 to March 2011, Kluger worked at Wilson Sonsini Goodrich & Rosati as a senior associate in the mergers & acquisitions department of the firm’s Washington office.
While at the law firms, Kluger regularly stole and disclosed material, nonpublic information to the co-conspirator regarding anticipated corporate mergers and acquisitions on which his firms were working. While at Cravath and Skadden, Kluger disclosed information relating to deals on which he personally worked. In an effort to avoid law enforcement detection later in the scheme, Kluger took information which he found primarily by viewing documents on Wilson Sonsini’s internal computer system, rather than from deals on which he personally worked.
Once Kluger provided the inside information to the co-conspirator, the co-conspirator passed it to Bauer, a professional trader. Bauer then purchased shares for himself, Kluger and the co-conspirator in Bauer’s trading accounts. He quickly sold the shares once the relevant deal was publicly announced and the stock price rose. Bauer gave the co-conspirator 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 ATM machines.
Bauer spent over $7 million of his share of the proceeds to purchase two properties – approximately $6.65 million for a condominium in New York and approximately $875,000 for a home in Boca Raton, Fla.
The complaint specifically identifies 11 transactions ahead of which Bauer, Kluger and the co-conspirator traded between April 2006 and February 2011, as outlined in an appended chart.
After Kluger joined Wilson Sonsini, the three conspirators took greater efforts to prevent detection of their insider trading scheme. They generally only spoke to each other about proposed transactions on payphones or prepaid cellular phones that they referred to as “throwaway phones” and purchased with cash. They often got a new phone for each of their insider trading deals.
As they became increasingly concerned that their criminal activity would be detected, Bauer and Kluger destroyed various pieces of evidence relating to their scheme and took other action designed to obstruct any investigation. Bauer destroyed a prepaid phone, discarding the pieces in two separate trash cans at a New York McDonald’s. Bauer also directed the co-conspirator to burn approximately $175,000 in cash that Bauer had paid him out of concern his fingerprints would be found on the money. Kluger destroyed his home computer, iPhone and a prepaid phone. Kluger also directed the co-conspirator to destroy his prepaid phone and discard the contents in a garbage can down the street from his house.
The complaint details a number of recorded conversations among the conspirators. Over the course of his conversations with the co-conspirator, Kluger made several statements regarding the likelihood that he would be charged for his illegal activities. During a March 17, 2011 call, Kluger stated, “I think there’s a pretty good chance that we get past it. I don’t think that they’re gonna conclude that they have enough to go to court with.” He also discussed destroying evidence, saying, “By the way, I got rid of my computer. I got rid of my iPhone where I had looked up some stock quotes. Those are gone. I mean history. Gone.” Kluger also told his co-conspirator that “...if they start looking at me and look at my bank records and all that other stuff it could be, it could get ugly.”
In a call recorded the next day, Bauer also referenced his concerns that he would get caught, saying, “I can’t sleep. I can’t sleep. I am waiting for the FBI to ride into my apartment. And I am on edge all night thinking that they’re coming in.” During the same call, he talked about how he would explain his large cash withdrawals, saying, “I used that as spending money. I don’t know, I will say I bought prostitutes if it comes down to it.” On March 21, 2011, he stated, “...the fact is we did something wrong. So it is not like we are being convicted of doing nothing. We did something wrong here.” In a March 28, 2011, call, Bauer said, “Yes, well you just feel more comfortable that we talk all on cell phones this entire time. You know. And that there is no way that they could ever be recorded.”
The maximum potential penalties the defendants face per count are as follows:
|COUNT(S)||DEFENDANT(S)||CHARGE||MAXIMUM POTENTIAL PENALTY|
|1||Bauer, Kluger||Conspiracy to Commit Securities Fraud||Five years in prison; $250,000 fine, or twice the aggregate loss to victims or gain to the defendants|
|2-12||Bauer, Kluger||Securities Fraud||Per count: 20 years in prison; $5 million fine|
|13||Bauer, Kluger||Conspiracy to Commit Money Laundering||20 years in prison; $500,000 fine, or twice the value of the property involved in the transaction|
|14,15||Bauer||Obstruction of Justice||Per count: 20 years in prison; $500,000 fine|
|16,17||Kluger||Obstruction of Justice||Per count: 20 years in prison; $500,000 fine|
U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Michael B. Ward in Newark, for the investigation leading to today’s arrests and complaint. He also thanked special agents of the IRS, under the direction of Special Agent in Charge Victor W. Lessoff, and the U.S. Securities and Exchange Commission’s Market Abuse Unit and Philadelphia Regional Office, under the direction of Daniel M. Hawke.
The government is represented by Assistant U.S. Attorneys Matthew E. Beck of the U.S. Attorney’s Office Economic Crimes Unit and Judith H. Germano, Chief of the Economic Crimes Unit, in Newark.
The charges and allegations contained in the complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.
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. For more information about the task force visit: www.stopfraud.gov.
|APPROX. DATES OF PURCHASES||ANNOUNCEMENT DATE||SECURITY||ILLICIT PROFIT|
|April 12-28, 2006||May 2, 2006||Advanced Digital Information Corp.||$1,724,208|
|May 2-10, 2007||May 17, 2007||Acxiom Corp.||$1,680,986|
|May 22-31, 2007||June 4, 2007||Palm, Inc.||$368,192|
|Sept. 26-27, 2007||Sept. 28, 2007||3Com Corp.||$2,433,946|
|Oct. 18-25, 2007||Oct. 25, 2007||Visual Sciences||$758,466|
|Feb. 25-March 27, 2008||March 31, 2008||Ansoft LLC||$2,954,598|
|April 17-20, 2009||April 20, 2009||Sun Microsystems, Inc.||$11,356,145|
|Aug. 24-Sept. 9, 2009||Sept. 15, 2009||Omniture, Inc.||$8,299,600|
|Oct. 8-Nov. 5, 2009||Nov. 11, 2009||3Com Corp.||$199,200|
|July 28-Aug. 17, 2010||Aug. 19, 2010||McAfee, Inc.||$494,100|
|Jan. 24-Feb. 17, 2011||Feb. 20, 2011||Zoran Corp.||$1,957,257|