The US Securities and Exchange Commission has charged two people for running an alleged insider trading scam involving such marquee mergers and acquisitions as Oracle's Sun purchase, Intel's McAfee buy, and HP's acquisition of 3Com.
According to the complaint filed on Wednesday by the SEC, the miscreants include a corporate lawyer, a Wall Street trader, and a unnamed middleman, all of whom benefitted illegally on trades involving eleven different high-tech companies in the past five years. The lawyer and the trader have been charged.
Central to to the complaint, filed in the US District Court for the District of New Jersey, is Matthew Kluger, a corporate associate who worked in the mergers and acquisitions department of the private equity and venture capital law firm of Wilson Sonsini Goodrich & Rosati (WSGR).
The filing alleges that Kluger stole non-public information relating to the mergers and acquisitions of the eleven firms, then passed this information to an unnamed middleman, who executed trades and profited illegally to the tune of $693,000 on HP's acquisition of 3Com in 2009 and Intel's acquisition of McAfee last year.
The middleman allegedly passed the information on to Garrett Bauer, a Wall Street trader who executed trades on the other nine companies, based on other insider information that came from Kluger, raking in $31.7m in ill-gotten gains.
According to the SEC, the trades were done ahead of the mergers or acquisitions, and once the stocks went up, Bauer sold his shares at a profit, passing a portion of his take back to the middleman, who in turn passed a portion back to Kluger. Kluger and the middleman each got approximately $342,000 back from Bauer – mostly in cash – the SEC says. From the HP-3Com and Intel-McAfee trades conducted by the middleman, Kluger received an additional $160,000 in cash, according to the SEC.
The SEC says that the unnamed middleman worked with Kluger at a real estate firm from 1987 to 1991, before Kluger went to New York University, from which he graduated in 1995 with a law degree. The middleman was a broker-dealer like Bauer, the SEC complaints says, and in the early 1990s they worked at the same firm (which was unnamed in the suit).
Bauer and the middleman met in Atlantic City, New Jersey, to exchange cash from the stock trades, with gambling providing their cover stories, according to the SEC.
For fear of leaving an audit trail, the complaint says, Kluger never opened any documents stored at WSGR that related to the pending mergers and acquisitions. He merely looked at the names that people had put on documents – board resolutions, press releases, and merger agreements – to divine what was going down. According to the SEC, this insider information was then passed from Kluger, to middleman, to Bauer over public phones or disposable cell phones that were subsequently destroyed.
In the middle of March 2011, when Kluger and Bauer thought their scheme had been exposed, they started destroying any records of their communications, according to the SEC, including Kluger destroying his iPhone and the disk drive in his computer, from which he had monitored the stocks that he had tipped Bauer to trade on.
"There is a good chance they're gonna eventually catch on," Bauer told the middleman in March, according to the SEC, "but if we all say nothing about each other, that's the only thing we can do, and that's the only way people can get caught. Because they have nothing until someone says something."
Looks like someone said something – such as the unnamed middleman, who is presumably cooperating with the SEC's investigation.
The SEC has asked to court to order Kluger and Bauer to "to disgorge, jointly and severally," their illegal gains, and to tack on a civil penalty of up to three times their shady profits. ®
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