A former attorney for Palo Alto-based law firm Wilson Sonsini Goodrich & Rosati was arrested April 6 for allegedly stealing information from the firm's computer network that resulted in $32 million in illegal profits for an insider-trading ring.
Matthew Kluger, 50, allegedly stole information on Silicon Valley and other company mergers and acquisitions and passed the material on to New York trader Garrett Bauer, 43, through an unnamed middleman, according to a 29-page criminal complaint against the two men filed by the U.S. government on April 5.
A separate 22-page civil complaint was filed by the Securities and Exchange Commission on April 6.
Kluger and Bauer face one count of conspiracy to commit securities fraud -- insider trading; 11 counts of securities fraud -- insider trading; one count of conspiracy to commit money laundering; and four counts of obstruction of justice.
Kluger worked for Wilson Sonsini at its Washington, D.C., office from December 2005 through March 2011 as a corporate associate with a focus on mergers and acquisitions.
The complaint alleges the insider-trading ring began around 1994. At the time, Kluger worked for prominent New York law firms Cravath, Swaine & Moore, LLP. In 1998, he worked for Skadden, Arps, Slate, Meagher & Flom, LLP.
Beginning in April 2006, four months after he began working at Wilson Sonsini, Kluger allegedly searched the firm's computer network to identify documents that showed a client was about to participate in a merger or acquisition.
He allegedly tipped the middleman who passed the information along to Bauer using public telephones or prepaid disposable mobile phones to avoid detection, according to court documents.
Bauer allegedly placed trades for himself and on behalf of Kluger and the middleman. Once the merger or acquisition was announced, Bauer sold the stock and passed on a portion of the profits in cash to the middleman and Kluger.
In mid-March 2011, Bauer and Kluger became concerned that the scheme would soon be uncovered by law enforcement. They destroyed mobile phones, computers and other records. Bauer suggested to the middleman that he should take the $175,000 in cash proceeds from a recent transaction and "burn it in a fire," according to court documents.
He and the middleman discussed washing the money in a washing machine to rid it of finger prints, according to a transcript of their phone conversation.
Kluger also allegedly told the middleman "as long as Mr. G (Garrett Bauer) keeps his mouth shut and I keep mine and you keep yours, I don't think they're gonna find enough of anything."
He and Bauer traded at least nine pending mergers and acquisitions in advance that were Wilson Sonsini clients.
Bauer's trades generated more than $31.6 million in illegal profits; Kluger and the middleman each profited by approximately $342,000, according to court papers. The middleman also gave Kluger $160,000 in cash for two illegal trades he conducted.
Kluger is alleged to have taken information 11 times from Wilson Sonsini's computers. He looked for board resolutions, press releases and merger agreements.
The titles of the documents revealed that specific companies were involved in impending mergers and acquisitions, but Kluger did not open the electronic documents. He believed that doing so would leave digital trails that would show he had illegally accessed the documents, court papers noted.
Kluger is alleged to have accessed information on Silicon Valley companies, including HP's acquisition of 3Com Corp.; Intel Corp.'s acquisition of McAfee, Inc.; Adobe Systems, Inc.'s acquisition of Omniture, Inc.; and Oracle Corp.'s acquisition of Sun Microsystems, Inc.
Bauer allegedly traded in nine instances, including the Sun Microsystems and Omniture acquisitions, according to the indictment. The middleman traded the 3Com and McAfee acquisitions for himself and Kluger, the court documents noted.
Kluger currently resides in Oakton, Va. He had his license to practice law in New Jersey revoked in September 2010 for failing to make certain required payments, according to court documents.
He and the middleman were coworkers at a real estate firm from 1987 to 1991, according to court documents.
Bauer, a New York resident, also knew the middleman when they worked together as broker-dealers from 1991 to 1994, according to the papers.
Courtney Dorman, Wilson Sonsini spokesperson, said the firm has provided its full support to the federal investigation and will continue to do so.
"We were shocked to learn of the conduct the government has alleged a former employee committed against us and two other prominent law firms.
"In light of the pending actions by the U.S. Attorney's Office and the SEC, we are not in a position to comment further," she said.