A former Wilson Sonsini Goodrich & Rosati PC attorney passed mergers and acquisition data in an insider-trading scheme that netted more than $32 million in illicit profits, U.S. prosecutors charged today.
Matthew Kluger stole non-public data on companies including Sun Microsystems Inc., 3Com Corp. and Acxiom Corp. (ACXM), according to a Federal Bureau of Investigation arrest complaint. Kluger passed tips to a conspirator who gave them to Garrett Bauer, a stock trader who also was arrested today, according to the complaint. Kluger made at least $500,000 on the scheme, the government said.
Kluger, who worked in the Washington office of Wilson Sonsini from December 2005 to March 2011, also passed illegal tips when he worked at Skadden Arps Slate Meagher & Flom LLP from 1998 to 2001 and during his employment at Cravath Swaine & Moore LLP from 1994 to 1997, according to the complaint.
“Kluger had access to inside information concerning clients’ potential sales and mergers,” according to the FBI complaint. “While at Cravath, Skadden and Wilson Sonsini, Kluger repeatedly violated his fiduciary and other duties of trust to the firms and their clients by providing inside information” to Bauer and the conspirator.
The men invested more than $109 million in the scheme and netted more than $32 million in illicit profits, according to the complaint. Bauer bought a $6.65 million condominium in Manhattan and a $875,000 home in Boca Raton, Florida, the FBI said.
Arrests in N.Y., Virginia
The U.S. Securities and Exchange Commission also filed a civil complaint against Kluger, 50, of Oakton, Virginia, and Bauer, 43, of New York.
U.S. Attorney Paul Fishman will hold a news conference today at noon in Newark, New Jersey, where the FBI complaint was filed in federal court. Bauer was arrested today in Manhattan and Kluger was arrested in Virginia, according to Rebekah Carmichael, a spokeswoman for Fishman.
Kluger “was careful to steal and disclose information about deals on which he did not personally work, but which he learned about by searching his law firm’s computer system,” according to the FBI. Kluger gave that inside data to the conspirator, who passed it to Bauer, with instructions on how many shares to buy for Kluger and the conspirator, the FBI said.
To avoid detection, the men turned in recent years to pay phones and prepaid cellular “throwaway” phones to discuss their illicit transactions, the FBI said. When they learned last month that authorities were investigating, all three men “destroyed various pieces of evidence relating to the scheme, including computers, an iPhone and their prepaid cellular phones,” the FBI said.
The FBI said Kluger funneled tips before the announcements in May 2006 that Quantum Corp. (QTM) would buy Advanced Digital Information Corp.; in May 2006 that Silver Lake Partners and Value Act Partners would buy Acxiom Corp.; in June 2007 that Elevation Partners would invest $325 million in Palm Inc.; and in September 2007 that affiliates of Bain Capital Partners LLC would acquire 3Com.
Kluger also supplied tips before announcements in September 2007 that Omniture Inc. would acquire Visual Sciences Inc.; in March 2008 that Ansys Inc. (ANSS) would acquire Ansoft Corp.; in April 2009 that Oracle Corp. (ORCL) would buy Sun; in September 2009 that Adobe Systems Inc. (ADBE) would acquire Omniture Inc.; in November 2009 that Hewlett-Packard Co. (HPQ) would buy 3Com; in August 2009 that Intel Corp. (INTC) would acquire McAfee Inc. (MFE); and in February 2011 that CSR Plc (CSR) would merge with Zoran Corp. (ZRAN), according to the FBI.
The illicit profits in those 11 transactions ranged from $199,248 in the Hewlett-Packard-3Com deal to $11.4 million in the Oracle-Sun deal, according to the FBI complaint.
The FBI complaint also charges that Kluger provided inside tips on Johnson & Johnson (JNJ)’s 1994 acquisition of Neutrogena Corp.; International Business Machine Corp.’s acquisition in 1995 of Lotus Development Corp.; IBM’s purchase in 1996 of Tivoli Systems Inc.; Unilever’s 1996 acquisition of Helene Curtis Industries Inc.; and America Online Inc.’s acquisition in 1999 of MovieFone Inc.
Agents from the FBI and Internal Revenue Service executed a search warrant at the conspirator’s home on March 8 and confronted him about suspicious trades and “numerous instances of structuring cash into and out of” his account, according the complaint. The conspirator then talked to Kluger on March 17 in a phone call cited in the complaint.
Kluger “expressed concern that law enforcement could tie him” to the conspirator, “admitted he was the source of the inside information and described obtaining documents from the Wilson Sonsini document system,” according to the FBI.
“If they start looking at me and look at my bank records and all that other stuff it could be, it could get ugly,” Kluger said on the call, according to the complaint.
The SEC complaint refers to a “middleman” who passed Kluger’s tips to Bauer. In mid-March, as Bauer and Kluger feared that authorities would detect their scheme, they began destroying phones, computers and records, the SEC complaint said.
“Bauer even suggested that the middleman should take the $175,000 in cash proceeds from a recent transaction and ‘burn it in a fire,’” according to the SEC. “Kluger also told the middleman, ‘as long as Mr. G (Garrett Bauer) keeps his mouth shut and I keep mine and you keep yours, I don’t think they’re gonna find enough of anything.’”
Bauer worked from October 1991 to January 1994 at a broker- dealer where the middleman also worked for a portion of the time, according to the SEC. Kluger and the middleman knew each other since at least 1987, and they worked together from 1987 to 1991, a year before Kluger enrolled at New York University School of Law, according to the SEC. The agency said its probe is continuing.
As a result of the scheme, Kluger profited by at least $500,000 and the middleman made at least $875,500, according to the SEC complaint.
Courtney Chiang Dorman, a senior vice president at Wilson Sonsini, didn’t immediately return a phone call or e-mail seeking comment. Cravath spokeswoman Robin Shanzer also didn’t immediately return a phone call and e-mail seeking comment.
“We have strict policies that protect our clients’ confidential information, which we monitor closely,” Skadden spokesman Brendan Intindola said in a statement. “It would be deeply disappointing if these policies were not followed in this instance. We are cooperating fully with the government in this matter.”
The criminal case is U.S. v. Garrett Bauer, 11-mj-3536, U.S. District Court, District of New Jersey (Newark). The SEC case is Securities and Exchange Commission v. Matthew H. Kluger and Garrett D. Bauer, U.S. District Court, District of New Jersey (Newark).
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