Illegal Trading Within Law Firm Busted

Jack Humphrey, Regulatory journalist
April 07, 2011 /

From 2006 until February this year, a corporate attorney and Wall Street trader have used their stealthy connection with a middleman to perpetrate an insider trading that involved several clients of a law firm, generating almost $32 million in illicit gains.

The Securities and Exchange Commission and the U.S. Attorney’s Office for the District of New Jersey sued On April 6 Matthew Kluger, formerly working at Wilson Sonsini Goodrich & Rosati, and Garrett D. Bauer for illegally trading pieces of inside information about the acquisition by several software and technology firms like Hewlett-Packard Co., Adobe Inc, and Oracle open source.

The suit filed before a federal court in Newark, N.J., is the second this year in a series of SEC investigations involving a technology firm, the first being in January when a New York-based hedge fund advisory firm, Trivium Capital Management, was sued for trading confidential information about Google’s 2007 second quarter earnings. The anomalous hedge fund, Galleon, was operated by Raj Rajaratnam who has been facing several insider trading charges from the SEC.

According to SEC’s suit, Kluger leaked to the middleman the information about 11 mergers and acquisitions that involved the clients of the law firm for which he worked.

“They plotted to fly under law enforcement radar by using disposable phones to hide their communications, cash withdrawals to obscure the flow of tainted money, and a middleman to conceal Kluger as the secret source of inside information,” said SEC enforcement head Robert Khuzami, adding that the stealthy communication only proved they were doing something illegal.

The transactions within the law firm whose confidential information was illegally traded inlcude the acquisitions of Advanced Digital Information Corp. by Quantum Corp., Visual Sciences Inc. by Omniture Inc., Sun Microsystems Inc. by Oracle Corp., Omniture Inc. by Adobe Systems Inc., 3Com Corp. by Hewlett-Packard Co., and McAfee Inc. by Intel Corp., among others.

The SEC noted that Kluger and Bauer had no direct relationship with each other, but were connected only by a mutual friend who acted as middleman for the inside information leaked from the law firm.

Because of the stealthy communication used by Kluger and the Wall Street trader, Bauer was able to withdraw hundreds of thousands of dollars from his bank accounts as kickback for the middleman, which made him out as not having been connected to Kluger. The middleman in return forwarded the $500,000 to Kluger as kickback.

Kluger and Bauer were ordered to disgorge their ill-gotten gains, in addition to permanent injunctions, fines, and prejudgement interest.

 

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