UPDATE, 6/6/12, 12:25 p.m. EDT: Judge Hayden sentenced former stock trader Garrett Bauer to nine years in prison late Monday, while mortgage broker Kenneth Robinson received a 27-month sentence Tuesday morning.
Former attorney Matthew Kluger was sentenced Monday to 12 years in prison for his role in a massive insider trading scheme that carried on for nearly two decades and was made possible in large part by his position as an associate with a series of Am Law 100 firms.
Prosecutors say the scheme netted a combined total of more than $37 million in illicit gains for the 51-year-old Kluger—who, according to federal sentencing guidelines, faced between 11 and 14 years in prison—and his two collaborators: former stock trader Garrett Bauer and mortgage broker Kenneth Robinson.
In handing down what she acknowledged was a harsh sentence, U.S. District Judge Katharine Hayden in Newark said that Kluger’s crime warranted such a stiff penalty because “it allows greedy, arrogant people to make money off others.”
In a statement to the court, Kluger expressed remorse for his actions. He said he wanted the court to know “how terribly, terribly sorry I am.” Kluger also expressed a desire to make reparations to some of those he wronged along the way. “I will do anything I can to try and regain a modicum of the trust that I destroyed [with] so many people and so many institutions,” he said.
The sentencing comes a little more than a year after prosecutors accused Kluger of participating in the insider trading ring in a federal complaint. As The Am Law Daily has previously reported, Kluger pleaded guilty to all four counts against him, including conspiracy to commit securities fraud, securities fraud, conspiracy to commit money laundering, and obstruction of justice.
The three-man operation kicked off in 1994, according to Robinson’s court testimony, when Kluger was a summer associate at Cravath, Swaine & Moore, and continued as he moved on to associate positions at Skadden, Arps, Slate, Meagher & Flom; Fried, Frank, Harris, Shriver & Jacobson; and, finally, Wilson Sonsini Goodrich & Rosati. Kluger stole confidential information related to corporate transactional work being handled by his employer at each stop, then passed details of pending corporate mergers to Robinson, the scheme’s middleman. Robinson would, in turn, pass the details on to Bauer, who would then use the inside information to purchase shares for all three men, according to Robinson’s testimony.
Across the span of the roughly 17-year scheme, Kluger and his cohorts traded ahead of more than 30 separate transactions, prosecutors say. In December, as part of a settlement agreement with the Securities and Exchange Commission, the three men agreed to repay their illegal profits from the conspiracy. Prosecutors have said that Bauer took the “lion’s share of the profits,” which is why the former trader was required earlier this year to forfeit roughly $31.6 million. For his part, Kluger agreed to forfeit $516,000. Robinson will pay $845,000.
In court on Monday, Kluger’s attorney—Alan Zegas of Chatham, New Jersey—argued that his client was insulated from Bauer during the course of the conspiracy and was misled by his coconspirators as to the amount of stock being purchased as a result of the inside information he was passing along. According to Zegas, Kluger claims the three men began the scheme with an agreement to split all proceeds equally, and that Kluger would have ceased providing the inside information had he known that Bauer planned on purchasing a higher volume of stock.
Assistant U.S. Attorney Judith Germano made it clear during the sentencing that the government didn’t accept Kluger’s claims of what she called a “loosey-goosey agreement” between the three men to split their gains three ways.
Zegas used his client’s supposed ignorance about the scope of the scheme to argue for a lighter sentence, even going so far as to ask that Hayden delay sentencing until a hearing could be scheduled to weigh additional evidence he said would establish his client’s ignorance about the scope of Bauer’s trading activities. The judge refused that request.
After being sentenced, Kluger told a group of reporters on hand that he had been forthcoming with the government since the time of his arrest and reiterated his belief that further discovery would reveal that his cohorts deliberately withheld information from him throughout the scheme. “A hearing with Ken Robinson on the stand . . . he would have admitted to doing things on each deal actively to mislead me,” Kluger says.
Zegas told reporters that he is considering appealing the sentence.
As we have previously reported, the case came together after Robinson agreed to cooperate with prosecutors and recorded several conversations with Kluger whose contents were contained in a criminal complaint filed against the former lawyer. Robinson pled guilty last April to one count of conspiracy to commit securities fraud and two counts of securities fraud, according to The Am Law Daily’s prior reporting. Like Kluger, Bauer pled guilty in December to all four counts against him.
Among the more interesting details of the case is the origin of obstruction of justice charges against Kluger and Bauer. In Kluger’s case, he destroyed a computer and an iPhone upon learning that authorities had searched Robinson’s home, according to court documents, while also instructing Robinson to destroy a prepaid cellphone that he had used to communicate with Kluger and Bauer. Meanwhile, Bauer’s obstruction of justice charge came about after he broke his own prepaid cellphone into two pieces and tossed the pieces in separate trash cans at a New York City McDonald’s.
Bauer was also scheduled to be sentenced late Monday, while Robinson is to be sentenced Tuesday morning. Bauer is facing up to 11 years in prison, while Robinson is expected to receive a shortened sentence on account of his cooperation with authorities. (Since his arrest, Bauer has been telling his story to groups of people at such places as business schools and law schools, encouraging others not to follow his criminal path, Bloomberg reports.)
For her part, Germano asserted that Kluger was the scheme’s mastermind and that none of the illegal trading would have been possible without the insider information he stole from his Am Law 100 employers. She also frequently returned to the fact that the scheme began while Kluger was just a summer associate—pointing out that he had already headed down a criminal path even before he became a full-time lawyer.
“He was an attorney who had a duty of trust,” she said, “a duty to uphold the confidence of [his clients and employers].”