The Securities and Exchange Commission today charged a corporate attorney and a Wall Street trader with insider trading in advance of at least 11 merger and acquisition announcements involving clients of the law firm where the attorney worked.
The SEC alleges that Matthew H. Kluger, who formerly worked at Wilson Sonsini Goodrich & Rosati, and Garrett D. Bauer did not have a direct relationship with each other, but were linked only through a mutual friend who acted as a middleman to facilitate the illegal scheme. Kluger and Bauer communicated with the middleman using public telephones and prepaid disposable mobile phones in order to avoid detection. According to the SEC's complaint, Kluger accessed information on 11 mergers and acquisitions involving the law firm's clients and then tipped the middleman. In at least nine instances, the middleman passed the information on to Bauer, who illegally traded for illicit profits totaling nearly $32 million.
In a parallel criminal action, the U.S. Attorney's Office for the District of New Jersey today announced the arrests of Kluger and Bauer.
"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," said Robert Khuzami, Director of the SEC's Division of Enforcement. "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."
Daniel M. Hawke, Chief of the SEC's Market Abuse Unit and Director of its Philadelphia Regional Office, added "This was a brazen and deplorable scheme in which Kluger, a lawyer, repeatedly abused his access to confidential client information. As this and recent cases demonstrate, the Division of Enforcement is working aggressively to root out and identify hard-to-detect insider trading by connecting patterns of trading to sources of material non-public information - whether those sources are law firms or others who are under a duty to keep such information confidential."
According to the SEC's complaint filed in federal court in Newark, N.J., Kluger, Bauer and the middleman middleman uer and the middleman deliberately structured their communications and trading so that Kluger and the middleman could share in the insider trading proceeds while Bauer could illegally trade and profit without being connected to Kluger as a possible source of information. Bauer withdrew cash from his bank accounts and kicked back hundreds of thousands of dollars to the middleman, who in turn delivered at least $500,000 to Kluger for his role in the scheme.
According to the SEC's complaint, over the past five years Kluger accessed and then tipped confidential information in advance of the following 11 mergers and acquisitions between April 2006 and March 2011:
The acquisition of Advanced Digital Information Corp. by Quantum Corp., announced May 2, 2006.
The acquisition of Acxiom Corp. by multiple entities, announced on May 17, 2007.
The strategic recapitalization of Palm Inc. with Elevation Partners LP, announced June 4, 2007.
The planned acquisition of 3Com Corp. by Bain Capital LLC, announced Sept. 28, 2007.
The acquisition of Visual Sciences Inc. by Omniture Inc., announced Oct. 25, 2007.
The acquisition of Ansoft Corp. by Ansys Inc., announced March 31, 2008
The acquisition of Sun Microsystems Inc. by Oracle Corp., announced April 20, 2009.
The acquisition of Omniture Inc. by Adobe Systems Inc., announced Sept. 15, 2009.
The acquisition of 3Com Corp. by Hewlett-Packard Co., announced Nov. 11, 2009.
The acquisition of McAfee Inc. by Intel Corp., announced Aug. 19, 2010.
The acquisition of Zoran Corp. by CSR PLC, announced Feb. 20, 2011.
The middleman traded in two deals on the basis of information that he received from Kluger and profited at least $690,000.
The SEC alleges that Kluger and Bauer violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.
The SEC's investigation was conducted by Colleen K. Lynch, David W. Snyder and John S. Rymas, members of the Market Abuse Unit in the Philadelphia Regional Office. G. Jeffrey Boujoukos and Scott A. Thompson are handling the litigation.
The SEC brought this enforcement action in coordination with the U.S. Attorney's Office for the District of New Jersey. The SEC also appreciates the assistance of the Federal Bureau of Investigation, the Financial Industry Regulatory Authority and the Options Regulatory Surveillance Authority.
The SEC's investigation is continuing.