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-andIntel'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.