Two Charged With Insider Trading In Oracle-Sun, HP-3Com, Intel-McAfee Deals6:04 PM EST Wed. Apr. 06, 2011
The Securities and Exchange Commission on Tuesday charged a lawyer and a stock trader with operating an insider trading scheme from which they made about $32 million in illegal profits from 11 high-profile IT industry mergers and acquisitions between 2006 and 2011.
Companies for which illegal trades were allegedly made by the defendants include Sun Microsystems, which was acquired by Oracle; 3Com, which was acquired by Hewlett-Packard; and McAfee, which was acquired by Intel.
SEC summary of alleged insider trades (click chart to enlarge)
The two defendants, plus a third unnamed co-conspirator, also traded on insider information in the 1990s, according to the SEC, but those trades were not the subject of the current suit.
According to the complaint, one defendant passed insider information about 11 pending mergers and acquisitions to the others, and later instructed his co-defendants to destroy cell phones and even burn $175,000 in cash because of the possibility of fingerprints.
A copy of the complaint, which was filed Tuesday with the U.S. District Court in New Jersey, is available on the Scribd website.
The defendants in the case include Matthew Kluger, a lawyer who allegedly stole material non-public information about pending mergers and acquisitions from his former employer, Wilson Sonsini Goodrich & Rosati, which served as the legal advisor to many of the companies involved.
The other defendant is Garrett Bauer, a stock trader. In the complaint, the SEC also said an unnamed "Middleman" passed the information between Kluger and Bauer and himself traded stock based on that information in two instances.
In the complaint, the SEC alleged that Kluger searched Wilson Sonsini Goodrich & Rosati's computer network for information about clients of that company which were about to participate in a merger or acquisition, and then passed the information to "Middleman," who then passed the information to Bauer.
In nine instances, the SEC alleged that Bauer placed trades for himself and on behalf of Kluger and "Middleman" based on the material non-public information. Once the merger or acquisition was publicly announced, Bauer sold the stock and passed part of the proceeds to "Middleman," who then passed part to Kluger.
In two instances, "Middleman" also placed trades directly on his own behalf, and passed part of the proceeds to Kluger, the SEC alleged.
The information was passed via public phones or via pre-paid cell phones the defendants used only to talk to each other to avoid detection, the SEC alleged. Those cell phones were regularly destroyed and replaced, according to the SEC.
In addition, Kluger allegedly destroyed a hard drive and an iPhone last month in order to prevent them from being used as evidence, the SEC said.
In a separate filing, also available on the Scribd website, the SEC also offers transcripts of alleged March, 2011 phone conversations between the defendants in which Kluger instructed "Middleman" to use pre-paid cell phones and to destroy cell phones to prevent access to stored phone numbers, and in which Bauer instructed "Middleman" to burn $175,000 in cash.
Bauer, after learning last month that the FBI and IRS were investigating him in relation to the insider trading scheme, destroyed his pre-paid cell phone on March 13, and five days later told "Middleman" to burn about $175,000 in cash that Bauer gave to "Middleman" because of concerns that Bauer's fingerprints were on the cash, the SEC alleged.
The phone calls were recorded by the FBI and IRS who on March 8 executed a search warrant at "Middleman's" home.
NEXT: Destroying Evidence And Burning $175,00 In Cash
Kluger last month, after learning about the investigation, destroyed a computer, an iPhone used to conduct searches, and a pre-paid cell phone, and then instructed "Middleman" to destroy a pre-paid cell phone used to call Kluger at home, the SEC alleged.
At one point, when Bauer realized that fingerprints on $175,000 in cash he gave to "Middleman" might contain his fingerprints, told "Middleman" to burn that cash.
"I'd almost - you know what, you know what, if you feel better burn the money and I'll give it back to you. Burn it? I would burn it in a fire," Bauer told "Middleman". according to the SEC's transcript.
The SEC also alleged that Kluger, "Middleman," and Bauer also passed acted on inside information provided by Kluger to conduct unlawful trades on Johnson & Johnson's 1994 acquisition of Neutrogena, IBM's 1995 acquisition of Lotus Development, IBM's 1996 acquisition of Tivoli Systems, Unilever's 1996 acquisition Helene Curtis, and America Online's 1999 acquisition of MovieFone.
The SEC is asking the judge in the case to force Kluger and Bauer to give up their proceeds plus interest from the trades in question, pay a penalty of up to three times those proceeds, and be permanently barred from violating SEC regulations related to stock trades.