April 13 (Bloomberg) -- You have to admire three guys who can keep an insider-trading ring going for 17 years, pocketing $34 million even as they toiled at their day jobs -- at least according to prosecutors who filed a federal complaint last week.
The ambitious threesome provides a road map to aspiring inside traders at a time when a steady income can be hard to come by. That’s to say nothing of the boost they’ve given to the disposable cell-phone industry, but more on that in a minute.
Charged in the case were stock trader Garrett D. Bauer and lawyer Matthew H. Kluger, both arrested on securities fraud and other charges on April 6. A co-conspirator, Kenneth T. Robinson, separately pleaded guilty for his role in the scheme in federal court in Newark, New Jersey, on Monday. He recorded his buddies on the phone in March after the feds raided his home.
Lawyers for Kluger and Bauer declined to comment on the allegations.
Consider some tips from this case, which in the hands of a hustling publisher holds promise for a winning “Insider Trading for Dummies” guide:
-- Start young. As the government tells the story in a criminal complaint and a related civil lawsuit filed April 6 by the Securities and Exchange Commission, Kluger was a law student at New York University in 1994 when he landed a summer job at the firm Cravath, Swain & Moore and discovered he had access to confidential information about planned corporate mergers. The greenhorn student allegedly called Robinson, whom he’d worked with at a Manhattan real estate company in 1991, to suggest that he track down a trader to buy and sell merger targets. Robinson allegedly recruited Bauer, a former co-worker. It would be a partnership made in heaven until the FBI raided Robinson’s Long Beach, New York, home on March 8.
-- Be open to learning from mistakes. The government says lawyer Kluger initially passed on tips about deals he worked on, but eventually realized it would be less risky to tap company computers for deals where he wasn’t involved. The complaint describes another shrewd decision: While Kluger allegedly read titles of confidential documents to glean trading ideas, he usually took care not to leave a record that he’d actually opened a computer file.
-- Take a break once in a while. When you’re making a lot of money, there’s no reason to be greedy. The complaint says the men “became increasingly concerned” in 1999 that they might get caught and decided to chill for a while. Robinson said in court Monday that the group resumed trading in 2001. Four years after that, when Kluger got a job at the law firm Wilson Sonsini Goodrich & Rosati in Washington, they picked up the pace, trading in nine merger targets as a group from 2006 to 2011, the complaint says.
-- Use prepaid cell phones that are harder to trace than a phone in your name, and pay for them in cash. In fact, make each new deal special by getting a brand new prepaid phone, and toss your old one. The three “often got a new phone for each of their insider trading deals,” the FBI said in a press release.
-- Make it fun. Hey, this doesn’t all have to be about raiding computer files and paranoid conversations on phones that can’t be traced. According to the complaint, Kluger made a field trip out of it when it was time for him to pick up his stash, driving regularly from his Virginia home to Long Island, where Robinson would give him his cut. The government also says that Bauer and Robinson ventured off to Atlantic City, New Jersey, to create an alibi for bank withdrawals that could add up to “tens or hundreds of thousands of dollars at a time.” Bauer used ill-gotten gains to buy a $6.65 million condominium in Manhattan and an $875,000 home in Boca Raton, Florida, the government says, plus $110,000 to spiff up the two places.
As for “don’ts” in the insider-trading saga, there are a couple of those too.
-- Don’t deviate from the plan. In the end, the crew that the feds describe as covering every base got sloppy. The government says Robinson himself traded on Kluger’s tips in 2009, neglecting to use the setup that separated Kluger, the information source, from Bauer, the trader. The New York Times, citing an anonymous person with knowledge of the investigation, reported that Robinson’s personal trades in Wilson Sonsini’s deals alerted the SEC to his role in the ring.
-- If you know there’s been a raid, don’t answer your phone. When Robinson started recording telephone calls with his alleged collaborators after last month’s raid, his pals seemed oblivious to the prospect that Robinson might have reason to set them up. While a recorder was running, Kluger made reference to a “thing” the group had done in April or May of 2006, a few months after he’d arrived at Wilson Sonsini. And Bauer blurted out that when he learned about the raid, “I went right up to my apartment and I broke the phone in half,” dumping each half into a different garbage can at McDonalds.
Bauer, the alleged trader for the group, was released on a $4 million bond Monday. The once-active trader will be electronically monitored in his $6.7 million Manhattan apartment, and was sent off in the custody of his mother.
Which leads us to the most important thing to remember if you’re considering an insider-trading gig: it pays to stay friends with your mom.
(Susan Antilla is a Bloomberg News columnist. The opinions expressed are her own.)
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