Garrett Bauer, a New York stock trader, pleaded guilty to his role in an insider-trading scheme that the U.S. says generated $37 million in illegal profits by relying on corporate merger tips stolen from four law firms.
Bauer, 44, joined middleman Kenneth T. Robinson and attorney Matthew H. Kluger in using nonpublic data to trade ahead of more than 30 corporate transactions over 17 years, he admitted in federal court in Newark, New Jersey. Robinson, who cooperated with prosecutors, pleaded guilty in April.
In charging the men in April, prosecutors said the scheme involved companies such as Sun Microsystems Inc., 3Com Corp. and Acxiom Corp. They said Bauer made more than $30 million on the scheme, while Robinson earned more than $875,000 and Kluger more than $500,000.
“After taking the lion’s share of the $37 million in profits, Bauer now faces punishment for conduct that undermines the fairness of our financial markets and the public’s trust in the safety of its investments,” U.S. Attorney Paul Fishman said in a statement.
Bauer admitted securities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and obstruction of justice. He faces as many as 20 years in prison on the fraud and obstruction counts when he is sentenced March 13. He forfeited cash and property worth more than $23 million.
‘Can’t Be Tolerated’
Bauer, who is free on $4 million bail, regrets his actions and has been giving lectures to students and traders about insider trading, said his attorney Michael Bachner. He has spoken at business schools, law schools, churches and synagogues to audiences ranging from 20 to 200 people, Bachner said.
“What he has conveyed in the lectures is that the conduct can’t be tolerated and isn’t tolerated,” Bachner said in an interview after the hearing. “The consequences of this type of behavior can be enormous, both emotionally and in the criminal justice system.”
Bachner said that while prosecutors put the illicit profits at $37 million, he estimates the gains at $23 million. U.S. District Judge Katharine Hayden will ultimately make a judgment on the amount of gain before sentencing Bauer.
Like Robinson before him, Bauer admitted the scheme started in 1994, when Kluger first worked as an associate for New York-based firm Cravath, Swaine & Moore LLP. Kluger began passing tips about anticipated corporate mergers and acquisitions to Robinson, who funneled them to Bauer to buy shares for the three men.
Bauer then sold shares after the corporate announcement and passed cash to Robinson to share with Kluger, he said. Kluger at first passed tips only on those deals on which he worked. As the scheme developed, Kluger stole information about deals on which he didn’t work, which he gleaned from the firm’s computers.
The scheme continued when Kluger worked from 1998 to 2001 at Skadden, Arps, Slate, Meagher & Flom LLP, another New York-based firm, and when he worked from 2001 to 2002 at Fried Frank Harris Shriver & Jacobson LLP, Bauer admitted. The scheme resumed in December 2005 and ran until March 2011, when Kluger worked in the Washington office of Wilson, Sonsini, Goodrich & Rosati PC.
In the later years, the men used pay phones and prepaid cellular phones to discuss their illicit scheme, Bauer said. After learning in March 2011 of the criminal investigation, Bauer admitted, he destroyed a cellular phone he used to talk to Robinson, and he told Robinson to burn $175,000 in illicit cash.
Robinson, 45, of Long Beach, New York, a mortgage broker who secretly recorded Bauer and Kluger for the Federal Bureau of Investigation, is cooperating with federal investigators, Fishman said after his plea hearing.
Bauer forfeited about $20 million in bank accounts and trading accounts, as well as a $6.65 million condominium on the Upper East Side of Manhattan and an $875,000 home in Boca Raton, Florida. Assistant U.S. Attorney Matthew Beck said that the properties had liens on them.
Kluger, 50, of Oakton, Virginia, is in plea negotiations with the U.S. Attorney’s Office in Newark, according to a Sept. 30 court filing. His attorney, Alan Zegas, didn’t immediately return a call seeking comment today.
Kluger and Bauer also were sued by the U.S. Securities and Exchange Commission. Kluger, who is representing himself, filed a response Sept. 19 to the SEC complaint in which he repeatedly invoked his constitutional right against self-incrimination.
The cases are U.S. v. Bauer, 11-mj-03536, and U.S. v. Robinson, 11-cr-00223, U.S. District Court, District of New Jersey (Newark).