By Jonathan Stempel and Andrew Longstreth
NEW YORK/NEWARK, New Jersey (Reuters) - A lawyer and a trader were accused by federal prosecutors of running a 17-year conspiracy to trade on corporate merger secrets stolen from three of the nation's most powerful law firms, in one of the largest U.S. insider trading cases on record.
Prosecutors accused Matthew H. Kluger and Garrett D. Bauer of reaping more than $32.2 million from trades on tips about upcoming mergers and acquisitions that Kluger learned as a lawyer at Wilson Sonsini Goodrich & Rosati PC, the pre-eminent firm representing Silicon Valley technology companies.
The complaint details a conspiracy that had its origins in Atlantic City, New Jersey, and ended with attempts by the defendants to cover their tracks, including a discussion about cleaning money in a washing machine to rid it of fingerprints.
Kluger also regularly leaked information he learned when he worked previously at two other law firms, Cravath Swaine & Moore LLP and Skadden, Arps, Slate, Meagher & Flom LLP, prosecutors said. Wednesday's charges do not cover any trades that may have been made at that time. For a graphic on top M&A law firms, clickhttp://r.reuters.com/tap88r
The charges come amid a broad government crackdown on insider trading. This includes the criminal trial of Galleon Group hedge fund founder Raj Rajaratnam and last month's charges that a U.S. Food and Drug Administration chemist traded on insider information about drug approvals.
Questions are also surfacing about David Sokol, a former top deputy to Warren Buffett who quit Berkshire Hathaway Inc last week amid questions over his trading in stock of a company Berkshire later agreed to buy.
LAUNDERING MONEY IN A WASHING MACHINE
Federal prosecutors said Kluger passed tips to an unnamed co-conspirator about mergers, such as Oracle Corp's takeover of Sun Microsystems Inc, Adobe Systems Inc's purchase of Omniture Inc, Hewlett-Packard Co's takeover of 3Com Corp and Intel Corp's purchase of McAfee Inc.
The co-conspirator would then tip Bauer, 43, who would make trades for all three based on the tips, according to the complaint filed with the federal court in Newark, New Jersey.
Kluger left Wilson Sonsini around March 11, prosecutors said.
The complaint relies on many recorded telephone calls. In one call, on March 28, Bauer was said to have discussed how to dispose of $175,000 of cash with his fingerprints that he had given the co-conspirator.
"Somebody did say: 'Why don't you just run it through a dish-, a washing machine?" the co-conspirator said.
"Well, I, I don't know," Bauer responded. "I mean, I've seen that in the movies, but I don't know. Who said that? Someone said that to you?
"Yeah, my cousin did," the co-conspirator said, laughing, "He goes: 'Run it through a washing machine.'"
More than $109 million was invested in the purported scheme, prosecutors said. Kluger is a resident of Oakton, Virginia, while Bauer lives in New York, they added.
"According to the complaint, the defendants exploited Kluger's access to sensitive, confidential information to make trading profits a sure thing," said U.S. Attorney Paul Fishman in New Jersey. "This kind of cheating corrodes confidence in our markets and swindles those who play by the rules."
The U.S. Securities and Exchange Commission filed civil charges against Kluger and Bauer.
At a hearing in Alexandria, Virginia, U.S. Magistrate Judge Theresa Buchanan ordered Kluger detained until another hearing set for Friday. Kluger surrendered his passport and asked the judge to consider appointing a lawyer for him.
U.S. Magistrate Judge Mark Falk ordered Bauer detained at a hearing in Newark. A prosecutor told the judge Bauer has more than $50 million in bank accounts and was "a very significant flight risk." Another hearing is set for April 18.
William Davis, a lawyer for Bauer, said after the hearing his client was "not pleased."
17 CRIMINAL COUNTS
Prosecutors said Bauer worked mainly at three proprietary trading firms in the period covered by the complaint, most recently at Lighthouse Financial Group and previously at JAG Trading LLC in Bloomfield Hills, Michigan.
The criminal complaint also contends Bauer spent $7.5 million of illicit proceeds in 2009 on a condominium on Manhattan's Upper East Side and a home in Boca Raton, Florida.
"I'm shocked to hear everything that's gone on," said Craig Bauer, who added he is Garrett Bauer's brother, in a telephone interview.
Craig Bauer is managing member of JAG, according to that firm's website.
Kluger and Garrett Bauer were charged in a 17-count criminal complaint, including 11 counts of insider trading, four counts of obstruction of justice, conspiracy to commit insider trading and conspiracy to commit money laundering.
Each of the insider trading counts carries a maximum penalty of 20 years in prison plus a $5 million fine.
The case is one of the largest in U.S. history based on the amount of illegal profit, a sum that may grow if investigators probe further, including into earlier trades, said a person familiar with the case and not authorized to talk publicly.
"We all have very, very careful procedures," said Garrett Moran, chief operating officer of the private equity group at Blackstone Group LP, at the Reuters Global Mergers and Acquisitions Summit. "You just don't do a trade unless you ask your compliance department in advance."
The case follows dozens of other U.S. insider trading prosecutions since October 2009 when Rajaratnam was arrested.
Rajaratnam, a one-time hedge fund billionaire, is on trial in Wall Street's biggest insider trading case in two decades.
Asked why the latest case is in New Jersey, Fishman said many companies do business there.
"This district is where Wall Street is wired," he added.
Investigators said the defendants hatched their plan at an Atlantic City meeting in which Bauer agreed to use gambling as a cover story to explain cash withdrawals he was making to funnel illegal profits to Kluger.
The complaint also said that, after the FBI searched the co-conspirator's home on March 8, Kluger and Bauer -- sometimes called "Mr. G" -- became nervous and began destroying cellphones, computer records and other evidence.
"As long as Mr. G keeps his mouth shut and I keep mine and you keep yours, I don't think they're gonna find enough of anything," the government quoted Kluger as saying on a March 17, 2011, cellphone call with the co-conspirator.
"By the way, I got rid of my computer," Kluger was quoted as then saying. "I got rid of my iPhone where I had looked up some stock quotes. Those are gone. I mean history. Gone."
Wilson Sonsini spokeswoman Courtney Dorman said the firm is cooperating with the federal investigation and was "shocked" to learn of the allegations against Kluger.
Skadden said it is also cooperating and has strict policies to protect clients' confidential information. A Cravath spokeswoman had no immediate comment.
The case is U.S. v. Bauer et al, U.S. District Court, District of New Jersey, No. 11-mag-03536.
(Additional reporting by Dena Aubin, Paritosh Bansal, Nadia Damouni and Matthew Goldstein in New York, and Jeremy Pelofsky in Alexandria, Virginia; editing by Dave Zimmerman, Tim Dobbyn and Andre Grenon)