June 5 (Bloomberg) -- Attorney Matthew Kluger was sentenced to 12 years in prison for insider trading, the longest term ever imposed for that crime and one that exceeds the 11 years given last year to Galleon Group LLC co-founder Raj Rajaratnam.
Trader Garrett Bauer, who joined Kluger in a scheme that prosecutors said generated $37 million in illegal profit, also was sentenced yesterday, getting a nine-year term. Kluger, 51, stole corporate merger tips from four law firms over 17 years and passed them to middleman Kenneth Robinson, who gave them to Bauer, 44. Robinson will be sentenced today.
All three men pleaded guilty last year in federal court in Newark, New Jersey, where U.S. District Judge Katharine Hayden yesterday said she wanted to send a strong message about the “radiating effect of the loss of confidence in the market” caused by insider trading. She said Kluger stole tips from “white shoe firms” in a “brazen” scheme that was conducted in a “thuggish” manner.
“This particular scheme is tremendously clear,” Hayden said. “People stay out of the stock market, in part, because they think it’s skewed toward the insiders. This case has given insight to the lack of credibility for the small investor.”
Lawyers for both Kluger and Bauer, a day trader, said they would appeal the sentences. Robinson, 46, who cooperated with authorities and secretly recorded the other men for the Federal Bureau of Investigation, is expected to get a shorter sentence. Prosecutors praised the terms imposed on Kluger and Bauer.
“The length of the sentence reflects Kluger’s enormous and lengthy betrayal of trust,” New Jersey U.S. Attorney Paul Fishman said in an interview. “This 17-year insider-trading scheme may well have been the longest of its kind.”
In pleading guilty last December, Kluger admitted to stealing data on about 30 transactions when he was at law firms including Skadden, Arps, Slate, Meagher & Flom LLP and Wilson, Sonsini, Goodrich & Rosati PC. The companies included Sun Microsystems Inc., 3Com Corp. and Acxiom Corp. When deals went public, Bauer sold shares and paid his partners in cash from automated teller machines. The men used disposable mobile phones to escape detection.
Rajaratnam was the most prominent of 66 people charged in an insider-trading crackdown by Manhattan U.S. Attorney Preet Bharara. All but seven pleaded guilty or were convicted at trial since 2009. Most got far less severe terms than Rajaratnam.
Alan Zegas, Kluger’s attorney, argued that his client deserved far less time because he made less than $1 million. Outside of court, Zegas said he would appeal, calling the term “far harsher than what I believed Mr. Kluger deserved.”
Kluger said he was disappointed with the sentence and doesn’t think his term should be longer than Rajaratnam’s. Kluger said he cooperated with authorities after his arrest and pleaded guilty, as opposed to Rajaratnam, who went to trial.
Prosecutors said Bauer made about $32 million in illicit profits in the scheme’s last four years. Zegas said Kluger believed the three men were splitting the profit equally, and his client had no idea that Bauer made 30 times more than he did. Zegas said Bauer and Robinson “dishonored” Kluger.
“How much honor is there among thieves?” Hayden asked.
Bauer’s lawyer, Michael Bachner, argued that his client deserved leniency for his charitable acts and because he has given 147 speeches to students and traders warning about insider trading since his arrest.
Bauer spoke in person or via Skype at schools including Harvard University, Yale University, the University of California at Berkeley, the University of Texas, the University of Michigan, Duke University and New York University. He sometimes called his talks “Confessions of an Inside Trader.”
Hayden questioned the value of Bauer’s speeches.
“Mr. Bauer is saying ‘Don’t be a criminal like I am,’ and I don’t know how much deterrent value there is,” Hayden said. “These are impressionable young people. There’s almost a curiosity interest in watching somebody come in and bare their soul.”
She said both Bauer and Kluger went to great lengths to persuade Robinson to keep the scheme secret after the FBI raided his house in March 2011.
“This crime was deliberate,” Hayden said. “It was done out of greed. Mr. Bauer is the greediest of all in terms of the amount that he made.”
Both Kluger and Bauer pleaded guilty to securities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering and obstruction of justice. They might have faced as long as 20 years in prison on all but the conspiracy to commit securities fraud count, which carried a five-year term.
Hayden said she judged Kluger more harshly because he abused his position of trust as a lawyer.
In his plea, Kluger said the scheme started in 1994, when he first worked as an associate for New York-based Cravath, Swaine & Moore LLP. 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 that he learned about by searching the firm’s computers.
The crimes continued when Kluger worked from 1998 to 2001 at Skadden Arps, another New York-based firm, and when he worked from 2001 to 2002 at Fried Frank Harris Shriver & Jacobson LLP, Kluger admitted. The scheme began again in December 2005 and ran until March 2011, when Kluger worked in the Washington office of Wilson Sonsini.
Kluger said the men used prepaid mobile phones and pay phones to discuss the deals and elude detection. After learning in March 2011 of the probe by the FBI and Internal Revenue Service, Kluger destroyed a mobile phone, a computer and an iPhone he used to look up stock quotes, he said.
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.
On May 1, Hayden signed a judgment requiring Kluger to forfeit $516,510 to the U.S. Securities and Exchange Commission, including $502,500 in illicit profit and interest of $14,010. The FBI had already seized $175,000 in cash from Robinson’s house on March 18, 2011. Half of that was intended for Kluger, which counts toward the amount he must forfeit, according to the SEC.
Kluger, of Oakton, Virginia, is the son of Richard Kluger, a Pulitzer Prize-winning social historian.
The case is U.S. v. Bauer, 11-cr-858, U.S. District Court, District of New Jersey (Newark).
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