Crooks, Not Hedge Funds in Fed’s Cross Hairs

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NYC, NY – Last week the FBI arrested Matthew Kluger, a former attorney at Wilson Sonsini Goodrich and Rosati; and Garrett Bauer, a stock trader in an alleged insider trading scheme which spanned more than 17 years, involved 11 trades, and netted the participants more than $32.0 million in illicit profits. 

This latest case is just another example of the nationwide crackdown on insider trading which began with the Galleon case a few years ago.  However, the Kluger case, like a few recent arrests, has nothing to do with hedge funds.  Instead, federal agents are clearly targeting any white collar criminals who profit from insider trading, regardless where they are employed.  


Kluger’s Idea

Kluger is alleged to have initiated the scheme in 1994, when he asked a middleman Kenneth T. Robinson, a former trader and mortgage broker in Long Island, New York (not named in the case) to find someone who could trade on inside tips he discovered from working at his law firm.  Kluger had worked at various M&A law firms including New York-based Cravath Swaine & Moore, Skadden Arps Slate Meagher & Flom LLP, and Wilson Sonsini Goodrich and Rosati.

The government alleges that Kluger passed tips he discovered at the law firms he worked at to a middleman (Robinson) who then conveyed these tips to Garrett Bauer. After the trader bought and sold stock based on the tips, he allegedly shared some of the money with Robinson, who then passed a cut of it to Kluger.


Almost Caught

The arrangement came to a temporary halt in 1999 when Bauer was accused of insider trading by a brokerage firm, TFM Investment Group. Bauer was accused of possessing inside information when he bought options on shares of First Brands just days before it was acquired by Clorox for $1.8 billion.  Bauer made close to $350,000 from this trade.  The judge later dismissed the lawsuit after they could not identify the source of Bauer’s information.  The case was referred to the SEC, who spent years trying to bring a case against Bauer.

As a result of this incident Kluger, Robinson and Bauer halted their scheme for close to 5 years while both Kluger and Bauer changed jobs a number of times.


The Scheme’s Downfall

The arrangement worked extremely well until the fall of 2009 when Robinson, the middleman, decided to trade on some of Kluger’s tips himself.  In October 2009, Robinson began buying shares in 3Com Corporation, which was acquired by Hewlett Packard in April, 2010.  As a result, Robinson netted nearly $200,000 in profits, according to the government.  But the gains also alerted the S.E.C. to Robinson.

Eventually, in early March of this year, federal authorities raided Robinson’s home in Long Island.  By March 17th Robinson began recording phone calls with Kluger and Bauer.  Nearly three weeks after Robinson began taping his colleagues in this insider trading scheme, authorities arrested both Kluger and Bauer at their homes on Wednesday, April 6th.  


Lawyers at Risk?

The Kluger case is the fifth lawyer with a major law firm in the past few years that has been charged with insider trading in the past few years.  Last month, the Securities and Exchange Commission charged former Dewey & LeBoeuf associate, Todd Leslie Treadway, with insider trading (click here to read more about this case).  In 2009, two former Ropes & Gray lawyers plead guilty to insider trading after having been caught up in the Galleon probe.  Last year a former Nixon Peabody associate also pleaded guilty to improper trading.

What has become increasingly clear from the slew of insider trading cases brought by federal authorities in the past two years is that they are not targeting hedge funds, expert networks, corporate insiders, or even lawyers.  Instead, regulators and federal prosecutors are aggressively trying to clean up the stock market and eliminate insider trading violations, wherever they occur.

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