Court Hands Down Stiffest Sentence Against Attorney for Insider Trading

by Mike Mintz on June 19, 2012 · 0 comments

in Ethics,Securities Law

Recently a New Jersey District Court sentenced an attorney to the longest prison sentence for insider trading-twelve years in a case entitled U.S. v. Bauer, 11-cr-858, U.S. District Court, District of New Jersey, Newark. The attorney in question is Matthew Kluger. Kluger grew up in a world of relative privilege-he is the son of Richard Kluger, a Pulitzer Prize-winning social historian.

Kluger’s prison sentence is even longer than the eleven years given to the infamous co-founder of Galleon Group-Raj Rajaratnam.

According to prosecutors, Kluger engaged in a scheme with a trader Garrett Bauer, which generated $37 million in illegal gains. Bauer received a nine-year sentence. Kluger used his position as an attorney at several top law firms to steal corporate merger information over seventeen years. He passed this information on to a middleman who then passed it onto Bauer.

All three defendants pled guilty. The middleman cooperated with the FBI by secretly recording Kluger and Bauer, and he is expected to receive a lighter sentence. When the court handed down the sentences on Kluger and Bauer, the judge noted that she wanted to send a strong message about the “radiating effect of the loss of confidence in the market” caused by insider trading. She went on to cite the distrust with which the small investor views the market, i.e. as deck of cards stacked against them.

According to the U.S. Attorney, Kluger’s 17-year scheme might have been the longest one of its kind, which consequently justifies the lengthy sentence he received.

Kluger worked for such “white shoe” firms as Cravath, Skadden Arps and Wilson Sonsini. He took advantage of his position to trade on the clients’ impending mergers. He started out by only using the information from transactions he worked on, but he later stole inside information from firm computers on transactions in which he was not involved. The companies involved included Sun Microsystems and 3Com. When the companies’ shares went public, Bauer sold the shares and paid the other conspirators in cash which he withdrew from ATMs.

Kluger’s attorney argued that he should have gotten a shorter prison sentence because he only made less than $1 million in ill-gotten profits. His client also argued that he cooperated with prosecutors after his arrest, and he pled guilty, unlike Rajaratnam who only received an eleven-year sentence.

It is believed that Bauer made approximately $32 million in the scheme’s last four years. Kluger thought that the conspirators were splitting their ill-gotten gains equally and was unaware that Bauer pocketed about thirty times more than he did. This just proves the old adage- ‘there is no honor among thieves.’

After Bauer’s arrest, he spoke at leading universities including Harvard and Yale in talks entitled “Confessions of an Inside Trader”. The judge did not give these speeches much weight when she handed down Bauer’s sentence. She also pointed out that contrary to Kluger’s and Bauer’s current pleas of “comparative innocence”, the two strenuously pressured the middleman to continue to keep the scheme a secret after the FBI raided his house.

The conspirators could have received a maximum of twenty years in prison for most of their crimes. Kluger got the harsher term because of his position as an attorney which carries with it a measure of trust.

Not only did Kluger and Bauer receive lengthy prison terms, they also had to forfeit a sizeable chunk of their assets.

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