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June 4, 2012

Tipping lawyer gets record long insider trading sentence

As reported in this AP article, federal prosecutors notched another record white-collar sentence today in federal court in New Jersey.  Here are some of the notable sentencing details:

A former attorney who admitted feeding privileged information to two confederates over the course of a 17-year insider stock trading scheme was sentenced Monday to 12 years in prison, the longest sentence ever handed out for insider trading, and the trader who reaped more than $20 million in profits from the tips received a nine-year sentence, authorities said.

U.S. Attorney Paul Fishman said former attorney Matthew Kluger's sentence is the longest handed out for that crime.  The scheme was carried out from 1994 to 2011 and is believed to be the longest ever uncovered by law enforcement, though the crimes charged dated only to 2005....

The 51-year-old Kluger, of Oakton, Va., and former trader Garrett Bauer, 44, of New York, admitted last year they conspired with a third man, New York mortgage broker Kenneth Robinson, who acted as the middleman.  Robinson was arrested in 2011 and secretly recorded conversations with the other men, including one in which Bauer discussed lighting $175,000 on fire to erase his fingerprints, according to court documents.  Robinson, who pleaded guilty to his role in the scheme, is scheduled to be sentenced Tuesday.

Kluger admitted passing advance information on company mergers to Robinson, who would give it to Bauer.  The trio was estimated to have made $11 million on tech company Oracle's acquisition of Sun Microsystems.

Assistant U.S. Attorney Judith Germano told the judge that Kluger was the mastermind. "He had wealth, intelligence and family support," she said. "He abused it all. Why? Because he could."  Defense Attorney Alan Zegas argued for a shorter sentence for Kluger and said that Bauer realized the lion's share of the profits while Kluger took only a small fraction of the total and was not aware of many trades that Bauer made on his own.

U.S. District Judge Katharine Hayden rejected Zegas' argument and said that every one of more than 30 insider trades made by Bauer was based on information provided by Kluger, whom she characterized as "amoral" and "thuggish."  She compared the trio to drug dealers for the way they used throwaway cellphones and multiple ATM accounts to withdraw cash and exchange it in envelopes or bags.

Zegas said he would appeal the sentence. Kluger, who said in remarks to the court that he was "deeply, deeply sorry," insisted afterward that the sentence was too harsh.  Hedge fund billionaire Raj Rajaratnam was sentenced to 11 years in October after being convicted in the biggest insider trading case in U.S. history.  "I guess it's better to take $68 million and go to trial and be unwilling to accept responsibility for what you did," Kluger said, referring to Rajaratnam, who maintained that he traded only on publicly available information.

Defense attorney Michael Bachner attempted to persuade the judge to reduce Bauer's sentence by mentioning the numerous public speaking appearances Bauer has made since his arrest at business schools and law schools and the extensive work he has done with children's charities.

Intriguingly, based on other press reports, it appears that both of these sentences were imposed within the calculated applicable guideline ranges.

June 4, 2012 at 10:35 PM | Permalink

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Comments

What I think is crazy is the law itself. For example, in my state theft of 20K or more is punishable of by nine years in prison. So what the law is saying is if one steals 20K one might as well steal 11 million or 68 million. Under federal law theft of government benefits in excess of 5K is a ten year crime. 5k? Say what...

There was a case recently in my state where some man embezzled 67K from his employer. He got six years. So how is that a proportionate sentence to anything these guys are getting. His sentence is less than one year for each million he stole will some poor fellow is serving one year for every 10K he still.

Welcome to American justice where the only things that matter are race and class.

Posted by: Daniel | Jun 5, 2012 11:38:48 AM

I think the reporter doesn't understand the difference between, insider trading, conspiracy, money laundering and income tax evasion. Insider trading is hard to prove. Money laundering and income tax evasion less hard. From reading the article I sense that most of the charges and convictions were likely for money laundering, income tax evasion, and probably conspiracy to boot. I doubt seriously that anyone was convicted of insider trading though that may have driven the other criminal acts. Does anyone have a link to the actual charges or verdict?

For what it's worth, I worked in the brokerage industry for eleven years and I think the idea that insider trading should be a crime is ridiculous. In many countries it is not considered a criminal act. The idea behind it is driven by the myth that a single event can drive the price of a share with certainty. The price of a stock is a function of multiple events and the response to those events by millions of buyers and sellers.

Any information you may possess, whether insider or not, offers you no assurance that the value of a share will rise or fall. You can have the most marvelous insider information but you do not know what other myriad forces will drive the price of a share, minute by minute and day by day. You pick any company that is publicly traded and I assure you there is no single issue, event or discovery which drives the price of its shares either direction any given day.

Posted by: Jardinero1 | Jun 5, 2012 7:35:38 PM

Jardinero1,

There is certainly information that once it is widely known causes the perceived value of a company to plummet (examine the sequence behind the stock sales that landed Martha Stewart in trouble for an example of this). I would And while I can't come up with a ready example as easily there is also information that known in advance can give an insider great confidence that the perceived value of a company is about to rise just as dramatically.

The reason to keep insider trading criminal is that that such sales violate duties that the parties owe to others, perhaps to the company as a whole, perhaps to other stockholders, depending on the exact nature of what was done and who did it.

Posted by: Soronel Haetir | Jun 5, 2012 9:06:30 PM

Soronel,

With regard to you first paragraph, after eleven years in the business, I never witnessed a single event, that anyone could theoretically have had prior knowledge of, that would have impacted the price of a share in any meaningful way. If it could have impacted the share price in a meaningful way, say the announcement of a merger or acquisition, then there is no way that anyone could know for certain which way the share price might move one way or another. Take the announcement of the merger of Compaq and HP, the price dropped, the net sellers all decided it was a bad idea, at the time of the announcement. Yet, in spite of the then conventional wisdom, the share price moved steadily up for several years.

Same thing after earnings announcements, prices can move any which way. If you had prior knowledge of earnings it would still be fifty/fifty which way the price would move.

In your paragraph two, corporate insiders have no legal duty to the functioning of secondary securities markets. Corporate insiders are also free to buy and sell their own shares nearly all the time subject to earnings announcement windows. They are surely acting on their own inside information and it is not illegal for them to do so. What insider trading laws prohibit is the general public or the brokers who serve the public from executing a trade based on knowledge of material, non-public, inside information, ever. That sounds kind of antithetical to your second paragraph and kind of unfair, don't you agree, letting corporate insiders trade on what they know, about seventy five percent of the time, but not letting the public trade on what they know, ever; kind of unfair, but the law nonetheless.

Does anyone have a copy of the verdict from this case? I am dying to know if there was actually a conviction on insider trading. If there was, it would be one of the very few.

Posted by: Jardinero1 | Jun 5, 2012 10:08:22 PM

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