On Wednesday, April 6, 2011, authorities arrested Matthew Kluger (a former associate at Wilson Sonsini Goodrich and Rosati) and Garrett Bauer (a Wall Street trader) and charged them with conspiracy, insider trading and obstruction of justice in connection a years-long scheme to capitalize on material nonpublic information obtained from Mr. Kluger’s law firm. The two men were also named in a case brought by the SEC based on the same events. The authorities allege that a unnamed third co-conspirator (or "the Middleman" as the SEC called him) participated in the scheme by receiving information from Mr. Kluger and passing it along to Mr. Bauer. Both Mr. Bauer and the Middleman conducted trading based on that information. In eleven transactions between 2006 and 2011, the men invested $109 million and made over $32 million in profits. Although the men had detailed plans to avoid being detected by authorities, Mr. Kluger and Mr. Bauer were after arrested telephone conversations between them and the Middleman discussing the scheme were recorded in March 2011.
Both the criminal charges and the SEC’s complaint detailed the steps taken by the two men in an effort to remain undetected which included: (1) Mr. Kluger’s accessing information from his law firm’s computer system (by looking at document names in the system index – and not looking at the actual documents); (2) using pay phones and prepaid "throwaway" cellular phones to discuss transactions; and (3) destroying computers, cellular phones an iPhone when they became aware that authorities were conducting an investigation; and (4) "structuring" the cash deposits in amounts less than $10,000 to avoid bank reporting requirements.
Authorities allege that the men had engaged in insider trading between 1994 and 1999 when Mr. Kluger was employed at the New York law firms of Cravath, Swaine & Moore and Skadden Arps Slate Meagher & Flom, but ceased doing due to fear of being detected. The scheme resumed when Mr. Kluger joined Wilson Sonsini in 2005.
The scheme appears to have rapidly fallen apart when law enforcement agents questioned the Middleman about the transactions. Shortly thereafter, the authorities were able to obtain recorded telephone conversations between the Middleman and Mr. Kluger and the Middleman and Mr. Bauer in which: (1) Mr. Kluger admitted he was the source of inside information; (2) Mr. Bauer admitted receiving the inside information; (3) Mr. Kluger and Mr. Bauer admitted that they destroyed evidence and encouraged the Middleman to do so; and (4) Mr. Bauer suggested that the Middleman either burn $175,000 in cash or take other steps to get Mr. Bauer’s fingerprints off those bills. Wiretaps or recorded conversations in insider trading cases has greatly increased in the last two years – the criminal trial against Raj Rajaratnam of Galleon Management which commenced in New York in March is one highly publicized example of this tactic.
The Criminal Complaint in U.S. v. Bauer, Mag. No. 11-3536 (D.N.J.) charges both men with 1 count of conspiracy to commit insider trading, 11 counts of insider trading, 1 count of conspiracy to commit money laundering and two separate counts for obstruction of justice against each defendant. According to the Press Release from the U.S. Attorney’s Office in New Jersey, the Government is also seeking the forfeiture of over $32 million, Mr. Bauer’s condo in New York and home in Florida and the contents of several bank accounts.
The SEC Complaint in SEC v. Kluger, Case No. 11-cv-1936 (D.N.J.) alleged violations of Section 10(b) of the Exchange Act (and Rule 10b-5 thereunder) for insider trading and violations of Section 14(e) of the Exchange Act (and Rule 14c-3 thereunder) for engaging in a transaction while in possession of material nonpublic information regarding a tender offer.
