The Securities and Exchange Commission has charged a lawyer and Wall Street
trader with insider trading in connection with 11 proposed or completed
corporate acquisitions, including some of the largest in recent years in the
tech industry involving the likes of Intel, Oracle and Hewlett-Packard.
SEC
officials on April 6 said the two men and a third unnamed middleman used
non-public information they obtained in advance of the proposed acquisitions
to generate as much as $32 million in illegal profits. The deals involved
include HP’s $2.7 billion acquisition of networking
vendor 3Com and Oracle’s
$7.4 billion purchase of Sun Microsystems—both in 2009—and
Intel’s $7.68 billion acquisition of security software maker McAfee in
2010.
According
to the SEC, Matthew Kluger, a corporate
lawyer who most recently worked at Wilson, Sonsini, Goodrich & Rosati,
would access information about the 11 proposed mergers and acquisitions
involving the firm’s clients, and then would tell the middleman. At least nine
times, the middleman passed the information to Garrett Bauer, who would trade
on the insider information, generating profits of almost $32 million.
Regulators
said in the SEC
complaint that Kluger and Bauer didn’t know each other, but had a mutual
friend in the middleman. The SEC laid out an elaborate scheme involving public
telephones, disposable mobile phones and cash withdrawals. The three people
devised a way to communicate and trade so that Kluger and the middleman were
able to share in the illegal proceeds. Meanwhile, Bauer could trade on the
information, all while not being connected to Kluger as the source of the
information.
Bauer
would withdraw cash from his various bank accounts and send money—totaling
hundreds of thousands of dollars—to the middleman, who would then give some of
it to Kruger. Kruger earned at least $500,000, while the middleman also made
$690,000 on two trades he made on the information.
“They
plotted to fly under law enforcement radar by using disposable phones to hide
their communications, cash withdrawals to obscure the flow of tainted money,
and a middleman to conceal Kluger as the secret source of inside information,”
Robert Khuzami, director of the SEC’s
Division of Enforcement, said in a statement. “Now, those same schemes and
devices serve only to make it clear beyond any doubt that Kluger and Bauer were
involved in an illegal scheme.”
The
U.S. Attorney’s Office for the District of New Jersey said Bauer, 43, of New
York, and Kluger, 50, of Oakton,
Va., were arrested at their homes by the
FBI and IRS on April 6.
“This
kind of cheating corrodes confidence in our markets and swindles those who play
by the rules. 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,” U.S.
Attorney Paul Fishman said in a statement. “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
two were charged with conspiracy to commit securities fraud, conspiracy to
commit money laundering, and obstruction of justice. Bauer also faces nine
counts of securities fraud; Kruger 11 counts.
According
to the U.S.
Attorney’s complaint, the insider trading scheme began in 1994, though the
three were only charged with the 11 instances that first began in 2006. During
that time, Kluger worked at three law firms: Cravath Swaine & Moore in New
York, Skadden, Arps, Slate, Meagher & Flom and
then Wilson Sonsini.
“The
impact of crimes commonly referred to as ‘insider trading’ is unmistakable,”
FBI Special Agent in Charge Michael B. Ward said in a statement. “Millions of
investors have entrusted their life savings to the integrity of the financial
markets and the belief of a level playing field. … 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.”
The
arrests of Kluger and Bauer came the same day prosecutors rested their case in
the insider-trading trial of billionaire Raj Rajaratnam, who founded and ran
the Galleon Group hedge fund. Rajaratnam was one of almost two dozen people
arrested in 2009 for a $25 million insider trading scheme that involved executives
from IBM and Intel, among others.
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