On Monday, June 4, 2012, New Jersey Federal Judge Katharine Hayden sentenced Matthew Kluger (a former associate at several prominent law firms) to twelve years in prison for his role in a insider trading scheme. One of his co-conspirators, Garrett Bauer (a Wall Street trader), received a nine-year sentence. On Tuesday, June 5, 2012, Judge Hayden sentenced Kenneth Robinson, another co-conspirator (who cooperated and wore a wire to obtain evidence against Messrs. Kluger and Bauer) to 27 months in prison. As U.S. Attorney Paul Fishman pointed out, Mr. Kluger’s sentence "is the longest handed out for" insider trading. Remarkably, the prison term for Mr. Kluger (who pled guilty and apparently recovered less than $1 million in the scheme) eclipsed the eleven year sentence received by Raj Rajaratnam (who did not plead guilty and earned tens of millions of dollars in his scheme).

As discussed here, on April 6, 2011, authorities arrested Mr. Kluger and Mr. Bauer and charged them with conspiracy, insider trading and obstruction of justice in connection with their conspiracy. The two men were also named in a case brought by the SEC based on the same events. The authorities allege that a third co-conspirator (later revealed to be Mr. Robinson, a mortgage broker) received information from Mr. Kluger and passed it along to Mr. Bauer. Both Mr. Bauer and Mr. Robinson conducted trading based on that information. 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 Goodrich and Rosati in 2005. In eleven transactions between 2006 and 2011, the men invested $109 million and made over $32 million in profits.

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.

However, as discussed here, when the SEC made adjustments in their investigative tactics, including analyzing suspicious traders and their network of connections on Wall Street, the Commission found that many of Mr. Bauer’s trades had come shortly before mergers in which Wilson Sonsini was providing advice. Further investigation revealed that Mr. Robinson was trading in some of the same stocks as Mr. Bauer. The information was shared with criminal investigators and the FBI convinced Mr. Robinson to wear a wire, leading to recorded telephone conversations between Mr. Robinson and Mr. Kluger and between Mr. Robinson 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 Mr. Robinson to do so; and (4) Mr. Bauer suggested that Mr. Robinson either burn $175,000 in cash or take other steps to get Mr. Bauer’s fingerprints off those bills.

In December 2011, both Mr. Kluger and Mr. Bauer pled guilty to four counts: (1) conspiracy to commit securities fraud; (2) securities fraud; (3) conspiracy to commit money laundering; and (4) obstruction of justice.

At Monday’s sentencing, Mr. Kluger was sentenced to 12 years. David Porter of the Associated Press reported (here) that prosecutors referred to Mr. Kluger as the mastermind of the scheme. While Mr. Kluger’s counsel argued for a lesser sentence because that the bulk of the profits were earned by Mr. Bauer, the Court rejected that argument, pointing out that each of the trades was based on a tip by Mr. Kluger. She further chastised their efforts to obstruct investigation of the seventeen-year scheme, comparing their activity to that of drug dealers for using throwaway cellphones and exchanging cash in bags or envelopes.

Mr. Bauer was sentenced to nine years. The AP Article described how Mr. Bauer’s attorney argued for lenience by mentioning numerous public speaking appearances he made at business schools and law schools and the work he has done with children’s charities. Counsel argued that he was not like Gordon Gekko, the villain of Oliver Stone’s 1987 film Wall Street (ironically, Michael Douglas, who earned an Oscar for that role, recently appeared in an FBI public service announcement regarding securities fraud, discussed here). Prosecutors painted a different picture, pointing out when the SEC began investigating his activities, Mr. Bauer increased his trading volume.

Mr. Robinson pled guilty in April 2011 (days after the arrest of Messrs. Kluger and Bauer) to one count of conspiracy to commit securities fraud and two counts of securities fraud. An article which originally appeared in the Wall Street Journal (here) following the filing of the original charges discussed the events and included an extremely insightful interview with Mr. Robinson. Today (June 5), Mr. Robinson was sentenced to 27 months.

In April 2012, Messrs. Kluger, Bauer and Robinson settled charges with the SEC. Because the three men had pled guilty to charges, they acknowledged those facts (as opposed to the SEC’s prior standard of neither-admitting-nor-denying the charges, which changed in January 2012). Under consent judgments, the three are enjoined from future violations of Sections 10(b) and 14(e) of the Exchange Act. Mr. Bauer agreed to disgorge $30,812,796 and pay prejudgment interest of $859,135. Mr. Kluger agreed disgorge $502,500, along with prejudgment interest of $14,010. Mr. Robinson agreed to disgorge $829,129 and pay prejudgment interest of $16,106. Each of the orders of disgorgement were deemed partially satisfied and offset on a dollar-for-dollar basis by assets seized under forfeiture orders in the criminal case.

After Monday’s sentencing, the AP article stated that Mr. Kluger believed that his punishment was too harsh, comparing it to Raj Rajaratnam 11-year sentence: "I guess it’s better to take $68 million and go to trial and be unwilling to accept responsibility for what you did." He plans to appeal the sentence. While the result was probably a shock to Mr. Kluger, given that he pled guilty (unlike Mr. Rajaratnam) and received such a small portion of the total profit in the scheme (especially compared to Mr. Rajaratnam), it reflects the trend previously discussed here – the length of sentences in insider trading cases has dramatically increased over the last two decades.