Inside trader eluded FBI for 17 years
Three sentenced in $37-million trading scheme
Every dawn in the early spring of 2011, Matthew Kluger peered out his window, wondering when federal agents would knock at his door. Kluger, a mergers-andacquisitions lawyer, says he worried that authorities were closing in on him as the source of illegal tips in a three-man insider-trading ring that had eluded detection for 17 years.
The knock came on April 6. U.S. agents handcuffed Kluger, hustled him into a Dodge Intrepid, drove to the Federal Bureau of Investigation office in Manassas, Va., and laid out the case against him. The evidence included tape recordings of Kluger telling the man he tipped to get rid of a cellular phone that could lead back to him — and to do it carefully because the authorities had dogs that can sniff out mobiles.
“I really would like to see this phone go bye-bye ASAP,” Kluger said, adding: “Do you want this to be our undoing?”
Kluger’s account offers a unique view of insider trading by a mid-level lawyer who moved from one powerful firm to another, exploiting his access to partners and confidential documents. It shows how difficult it is to police such activity when conspirators take care to conceal their crimes and trade with discipline. The trio’s downfall came only when one of them changed the routine after almost two decades.
Their stealth masked Kluger’s ability to steal secrets from some of the most prominent U.S. law firms, including Wilson Sonsini Goodrich & Rosati PC and Skadden, Arps, Slate, Meagher & Flom LLP. The three men made $37 million in profit on deals involving some of the largest technology companies, including Oracle Corp., Adobe Systems Inc., Hewlett-packard Co. and Intel Corp.
The plan was simple. Kluger, 51, gleaned details of mergers at four of the six law firms where he worked. He discussed the most promising deals with Kenneth Robinson, a mortgage broker and old friend. Robinson then alerted his friend, Garrett Bauer, a day trader who bought shares of companies in play. After the deals went public, Bauer sold the stock at a profit. Then Bauer withdrew $50 bills at automated teller machines and paid Robinson, who split it with Kluger. The arrangement worked 30 times between 1994 and 2011.
In the most lucrative one, Bauer bought 4.5 million shares of Sun Microsystems Inc. based on Kluger’s tip that the company would be bought by Oracle. Bauer sold shares for an $11.4-million profit after the deal’s announcement in April 2009.
All three men pleaded guilty last year in federal court in Newark, where prosecutors built the case. The government said it was one of the longest-running insider trading schemes ever, with Bauer making $32 million in illicit profit. Kluger, who made less than $1 million, was sentenced last month to 12 years in prison, the longest insider-trading term in U.S. history. By contrast, Raj Rajaratnam, the Galleon group llc co-founder convicted of masterminding a much bigger, more profitable insider-trading ring last year, received an 11-year sentence.
Bauer got nine years. He began serving his term this month at the Federal Prison Camp in Montgomery, Ala. Robinson will serve 27 months, a reward for co-operating with au- thorities. Both Kluger and Bauer are appealing their sentences.
Kluger graduated in 1984 from Cornell University, where he studied hotel administration, then moved to New York to work in residential real estate. For a few weeks in 1991, his co-worker was Robinson. While selling cars in Roslyn, N.Y., Kluger decided to pursue a career as a lawyer. He started at Brooklyn Law School, then transferred to New York University. After his second year, he became a summer associate at Cravath, Swaine & Moore LLP, a prominent New York firm, assigned to mergers and acquisitions.
During that summer, he talked on the phone to Robinson. Robinson was intrigued by the material, non-public information on public companies that Kluger saw daily.
“He said, ‘So what you’re telling me is you get to know what’s going to happen before the rest of the world does,’ ” Kluger said. “I said, ‘Yeah, I guess.’ He said, ‘You could make a lot of money with that information.’ I remember saying, ‘Yeah, but it’s really risky. You could end up going to jail.’ ”
After working with Kluger, Robinson took a job at Weiss, Peck & Greer, where he met Bauer. Robinson told Kluger he should meet Bauer, who bought and sold so many shares that any tainted trades would not arouse suspicion by the SEC.
By 1995, the trio had their first big score when International Business Machines Corp. bought Lotus Development Corp. They split profits of about $213,000.
Bauer’s profits began to grow, while Kluger said he personally never made more than $50,000 or $60,000 on any deal in those years. In court documents, prosecutors said the illicit profits were about $423,000 when J&J bought Cordis Corp. in November 1995. In 1997, the profits were $490,000 when NationsBank bought Barnett Banks Inc. in the largest banking acquisition ever at the time. Most of the money went to Bauer.
Kluger began work in 1998 at another prominent firm in New York, Skadden Arps. Based on his tips, the illicit profits were more than $1 million on inside information that Intel would buy DSP Communications Inc., according to prosecutors. Kluger said he made about $50,000 on that deal, and Robinson told him the three made a total of $150,000 after Bauer paid taxes.
Kluger got his final shot at the action of big mergers when Wilson Sonsini hired him at its office in Reston, Va., in December 2005. The firm later moved to a Washington office, and his salary eventually rose to $300,000 a year. In April 2006, Bauer bought 477,600 shares of Advanced Digital Information Corp. before its acquisition by Quantum Corp. The illicit profit was $1.7 million.
Ten more insider trades followed during Kluger’s time at Wilson Sonsini, including the Sun Microsystems deal that made $11.4 million in illicit profit.
Bauer weathered a 2007 SEC investigation into his activities, Kluger said.
But Kluger had no way of knowing that the SEC never ended its 2007 investigation. The agency was using new technology to confirm its suspicions that Bauer had an inside source on Wilson Sonsini merger deals. The Philadelphia office covertly monitored Bauer’s trades for three years to find the source.
In 2009, an investigator noticed that Robinson and Bauer often traded in the same stocks, although Robinson avoided the Wilson Sonsini deals. Then the SEC got a break. Robinson bought shares of 3Com Inc. before its acquisition by Hewlett-Packard, a deal handled by Wilson Sonsini. Investigators concluded that Robinson and Bauer had a common source, the person said, asking not to be identified because the investigation was confidential.
In the summer of 2010, the SEC went to the U.S. Attorney’s Office in New Jersey. Prosecutors took up the case, working with federal agents who approached Robinson in March 2011. Within days, Robinson agreed to co-operate. Prosecutors charged Kluger and Bauer with securities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering and obstruction of justice. Robinson pleaded guilty a few days later.
Both Bauer and Kluger pleaded guilty last December. Kluger has also settled an SEC lawsuit, agreeing to pay $516,510 for his illicit profit while he worked at Wilson Sonsini.
Kluger and Bauer were sentenced by U.S. District Judge Katharine Hayden on June 4. Hayden said Kluger engaged in “thuggish” behaviour that helped undermine investor confidence in the market.
The scheme succeeded for so long, she said, because of its simplicity, the discipline of its limited number of people and its “essential amoral nature, where anything and everything involving trust and honour was thrown out of the window because of that blissful access to information that Mr. Kluger enjoyed.”