AN INSIDER TRADING RING, BLUE COLLAR TACTICS AND CASH TO BURN
Blue collar tactics such as wire taps and wired informants continue to be key in insider trading cases. First there was Raji Rajaratnam, the billionaire founder of Galleon Management who is now on trial. Then there were the expert network cases with high profile seizures and wire taps leading to indictments and parallel civil charges from the SEC (here).
Now an insider trading ring composed of an attorney who misappropriated inside information from prominent law firms, a professional trader who placed trades in multiple take-over stocks yielding millions of dollars in illegal profits appear to have been undone by their mutual friend who served as a go-between to help insulate them from getting caught. The go-between, called CC-1 by the U.S. Attorney or the “middleman” by the SEC, has traded his role as insulation for his friends for that of cooperating witness following a search of his house. He taped attorney Matthew Kluger and trader Garrett Bauer. Unlike Galleon or the expert network cases however, the tapes are not of passing inside information or trades but of after-the-trade conversations quoted in part in the criminal complaint. Messrs. Kluger and Bauer were named as defendants in a criminal complaint and an SEC enforcement action. U.S. v. Bauer, Mag. No. 11-3536 (D. N.J. Filed April 6, 2011); SEC v. Kluger, Case No. 11-cv-1936 (D. N.J. Filed April 6, 2011).
The insider trading scheme began by 1994, according to the criminal complaint, and continued through at least late February 2011 when the last trade was placed. It appears to have been uncovered following the execution of a search warrant by the FBI and the IRS at the residence of CC-1 on March 8, 2011. This yielded information about a scheme in which Mr. Kluger was the source of the inside information. He has been employed as an associate at Cravath, Skadden, and most recently at Wilson Sonsini. Mr. Bauer was the trader. He has been employed as a professional stock trader at RBC Professional Trader at RBC Professional Group, JAG Trading, and most recently at Lighthouse Financial Group. Their mutual friend, CC-1, was the middle man. For a brief time in the early 1990s he worked at a firm which employed Mr. Kluger before he attended law school. In the mid-1990s he worked at a venture capital firm with Mr. Bauer. Over time Mr. Kluger and Mr. Bauer each became friends with CC-1.
In the beginning information was stolen first from Cravath and later Skadden, according to the criminal complaint Once Mr. Kluger obtained the inside information about a pending deal he was working on he typically passed it to CC-1 who in turn gave it to Mr. Bauer along with the specific number of shares to be purchased. The securities would be sold after the public announcement. In the early part of the scheme Mr. Bauer and CC-1 would travel to Atlantic City to create an alibi for the cash Mr. Bauer withdrew from his accounts and gave to CC- 1 and Mr. Kluger as their proceeds from the insider trading scheme.
Between 1994 and 1999 the three men traded on inside information concerning the acquisition of five companies: Neutrogena Corporation; Lotus Development; Tivoli Systems; Helene Curtis; and MovieFone. Although they took steps to avoid detection their increasing concern about getting caught caused them to stop. In addition, Mr. Kluger left Skadded in 2001 and did not have access to inside information until he joined Wilson in 2005.
The ring began insider trading again shortly after Mr. Kluger started working as an associate at Wilson in December 2005. Over the next five years the men would invest over $109 million in eleven take-over stocks, reaping $32,365,000 in trading profits.
Mr. Kluger obtained inside information on deals where he was not on the legal team while at Wilson. Shortly after joining the firm Mr. Kluger devised a way to search its document management system to identify materials relating to pending merger and acquisition deals. The three men then renewed their insider trading scheme using throw away telephones or public phones to avoid detection. Generally they used the same pattern as in the earlier years.
During the five year period beginning in May 2006 the three traded in eleven stocks. Mr. Kluger obtained the information. Mr. Bauer placed the trades. CC-1, who traded in two deals, served as the conduit. According to a chart by the SEC (which is also incorporated in the criminal complaint) the three men traded while in possession of inside information in the shares of: Advanced Digital Information, Acxiom, 3Com (two deals), Palm, Visual, Ansoft, Sun Microsystems, Omniture, MacAfee and Zoran.
Unlike the Galleon and expert network cases, the blue collar tactics here did not yield tapes of the stock trades. Rather, following the search of his residence, CC-1 taped separate conversations he had with either Mr. Kluger or Mr. Bauer. In those conversations the men discuss their fear of getting caught, steps they took to evade detection and the destruction of evidence. For example in conversations with CC-1 Mr. Kluger is quoted about his concern of being connected to CC-1, his sources of information at the law firm, the lack of evidence against him and getting rid of incriminating evidence such as his iPhone that he used to check stock prices. In conversations with CC-1 Mr. Bauer is quoted about using disposable phones and throwing them away, his intention not to cooperate with law enforcement if caught and his receipt of inside information over the years. Because of his increasing concern of apprehension Mr. Bauer at one point on the tapes told CC-1 to burn $175,000 in cash which may have had his finger prints on it.
The criminal complaint charges the two men with one count of conspiracy to commit securities fraud, eleven counts of securities fraud and one count of conspiracy to commit money laundering. In addition, each defendant is charged with two counts of obstruction. It also seeks the forfeiture of eight bank or securities accounts and a sum of money equal to $685,000.
The SEC’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e). Both cases are pending.