" Confessions of an Insider Trader" By David Voreacos

Every dawn in the early spring of 2011, Matthew Kluger peered out a window of his home in Oakton, Va., wondering when federal agents would knock at his door. Kluger, a mergers-and-acquisitions lawyer, says he worried that authorities were closing in on him as the source of illegal tips in a three-man insider-trading ring that eluded detection for 17 years.

The knock came on April 6. U.S. agents handcuffed Kluger, hustled him into a Dodge Intrepid, and drove to the Federal Bureau of Investigation office in Manassas, Va. The evidence against him included recordings of him telling the man he tipped to get rid of a cell phone that could lead back to him, and to do it carefully because authorities use phone-sniffing dogs. “I really would like to see this phone go bye-bye ASAP,” Kluger said, adding: “Do you want this to be our undoing?”

Kluger began confessing his crimes to authorities the day of his arrest. He first detailed them to a Bloomberg reporter nine days later, after posting bail in Newark, N.J., when he needed a ride back to jail to pick up his heart medicine. He offered additional details over the next year. His story provides a unique view of insider trading by a mid-level lawyer who moved from one powerful firm to another, exploiting his access to partners and confidential documents. It shows how difficult it is to police such activity when conspirators take care to conceal their crimes and trade with discipline. The trio’s downfall came only when one of them changed the routine after almost two decades.

Their stealth helped Kluger steal secrets from some of the most prominent U.S. law firms, including Wilson, Sonsini, Goodrich & Rosati and Skadden, Arps, Slate, Meagher & Flom. The three men made $37 million in profit on deals involving some of the largest technology companies, including Oracle (ORCL), Adobe Systems (ADBE), Hewlett-Packard (HPQ), and Intel (INTC).

The plan was simple. Kluger, 51, gleaned details of mergers at four of the six law firms where he worked. He identified the most promising deals with Kenneth Robinson, a mortgage broker and old friend. Robinson then alerted his friend Garrett Bauer, a day trader who bought shares of companies in play. After the deals went public, Bauer sold the stock at a profit. The arrangement worked 30 times between 1994 and 2011. “There was an excitement on finding a deal that looked promising,” Kluger says. “There was an excitement on reading what the profits were. The final excitement was picking up a bag of cash.”

All three men pleaded guilty last year in federal court in Newark, where prosecutors built the case. The government said it was one of the longest-running insider-trading schemes ever, with Bauer making $32 million in illicit profit. Bauer got nine years, which he began serving in July. Robinson will serve just 27 months, a reward for cooperating with authorities.

Kluger, who made less than $1 million, was sentenced on June 4 to 12 years in prison, the longest insider-trading term in U.S. history. He has also settled a Securities and Exchange Commission lawsuit, agreeing to pay $516,510. By contrast, Raj Rajaratnam, the Galleon Group co-founder convicted of masterminding a much bigger insider-trading ring last year, received an 11-year sentence and was hit with more than $155 million in civil and criminal penalties. Both Kluger and Bauer are appealing their sentences. Kluger says he was surprised to learn at the FBI offices that Bauer had kept more than 90 percent of the profit. He says he thought they were splitting the money equally. “Maybe you want to laugh and say of course there’s no honor among thieves,” Kluger says. “But even when you’re doing something you’re not supposed to do, I trusted that they were honoring the commitments that they had made.”

After graduating from Cornell University in 1984, Kluger worked in restaurants in Texas, sold Toyotas in California, then moved to New York to work in residential real estate. Finally, Kluger decided to pursue a career as a lawyer. In 1994, after his second year of law school, he became a summer associate at Cravath, Swaine & Moore, assigned to mergers and acquisitions. During that summer, Kluger says, he talked on the phone to Robinson. Robinson was intrigued by the nonpublic information on public companies that Kluger had access to each day. “He said, ‘So what you’re telling me is you get to know what’s going to happen before the rest of the world does,’ ” Kluger says. “I said, ‘Yeah, I guess.’ He said, ‘You could make a lot of money with that information.’ I remember saying, ‘Yeah, but it’s really risky. You could end up going to jail.’ ” Robinson, who will report to prison after the Sept. 3 Labor Day holiday, declined to comment.

After Robinson arranged for Kluger to meet Bauer, Kluger passed information about the acquisition in 1994 of Neutrogena by Johnson & Johnson (JNJ), a Cravath client. That year, Kluger left Cravath and worked briefly at Milbank, Tweed, Hadley & McCloy, another New York firm. Soon the men had their first run-in with investigators. An SEC lawyer called Kluger, asking about three transactions on which he had leaked inside information. Regulators subpoenaed bank and phone records. Kluger hired a lawyer. “I was ready to sell Robinson up the river, like he ultimately did to me,” Kluger says. The probe fizzled without the SEC suing anyone or prosecutors filing charges. “They had us in the cross hairs and backed off,” Kluger says. “We were emboldened, somewhat.”

The scheme continued while Kluger worked at two other prominent law firms, Skadden Arps and Fried, Frank, Harris, Shriver & Jacobson. In December 2005, he landed at Wilson Sonsini, working in Washington, D.C. Eleven insider trades followed, including a Sun Microsystems deal that made $11.4 million in illicit profit.

Source: http://www.businessweek.com/articles/2012-08-02/confessions-of-an-insider-trader#r=nav