A former lawyer and a former stock trader were arrested Wednesday and charged with running an insider trading scheme straight out of the movie "Wall Street" that brought in so much money they spoke about burning $175,000 in cash to avoid detection.
Garrett Bauer, of New York, and Matthew Kluger of Oakton, Va., face multiple counts of insider trading and obstruction and single counts of conspiracy and money laundering. Authorities said the scheme netted more than $30 million in profit over the last five years.
"Their 'greed is good' mentality eventually led to their criminal acts being exposed," said Michael Ward, head of the FBI office in Newark, using the famous line spoken by Michael Douglas' Gordon Gekko character in Oliver Stone's 1987 movie.
The 43-year-old Bauer, wearing a gray pullover and jeans, appeared in handcuffs and ankle shackles in U.S. District Court in Newark on Wednesday afternoon. He did not enter a plea and was ordered detained until a bail hearing. Kluger, 50, was to appear in federal court in Alexandria, Va.
Bauer is accused of reaping the lion's share of the profits. In seeking detention for Bauer, Assistant U.S. Attorney Matthew Beck said investigators seized two trading accounts belonging to Bauer worth a total of $20.5 million and bank accounts worth more than $37 million. Bauer's attorneys, William Davis and Donald Derfner, called the amounts "exaggerated, by a lot," and the U.S. attorney's office later corrected the bank accounts figure to $37,000.
If convicted, Bauer could face 12 to 15 years in prison by a conservative calculation, Beck told U.S. Magistrate Mark Falk. The government is seeking to seize his $6.65 million home on New York's Upper East Side and another home in Boca Raton, Fla.
According to the criminal complaint, Kluger illegally took information on upcoming company mergers from his law firm, Wilson Sonsini Goodrich & Rosati, which is based in California's Silicon Valley and has offices in Washington, D.C., and passed it on to a middleman, who has not been identified.
The middleman would pass the information to Bauer, who would buy stock ahead of the mergers. Among the mergers were Adobe Systems' acquisition of Omniture, Hewlett-Packard's acquisition of 3Com and Oracle's purchase of Sun Microsystems.
The Oracle-Sun merger made the scheme more than $11 million in illicit profit, the complaint alleges.
In a statement emailed Wednesday, the law firm said: "We were shocked to learn of the conduct the government has alleged a former employee committed against us and two other prominent law firms. We have provided our full support to the federal investigation and will continue to do so. In light of the pending actions by the U.S. Attorney's Office and the (Securities and Exchange Commission), we are not in a position to comment further."
Authorities allege the conspiracy dates back to the mid-1990s, when Kluger worked for prominent New York law firms Cravath Swaine & Moore and Skadden, Arps, Slate, Meagher & Flom, though the substantive counts released Wednesday relate to activity when he worked for Wilson Sonsini.
Evan Chesler, head of Cravath, said his firm "has very strong policies designed to prevent" what Kluger is alleged to have done and said the company is cooperating fully with the investigation.
In a statement, Skadden also said it is cooperating with investigators and said: "We have strict policies that protect our clients' confidential information, which we monitor closely. It would be deeply disappointing if these policies were not followed in this instance."
Bauer and Kluger were able to escape detection by using prepaid, disposable cellphones and by not having direct contact before the stock purchases, according to Daniel Hawke, regional director of the SEC's market abuse unit.
During one phone conversation recorded by the unnamed co-conspirator, Bauer tells the person to destroy $175,000 in cash because his fingerprints are on it, authorities say.
"You know what, if you feel better burn the money and I'll give it back to you," Bauer says.
"Burn it?" the person asks.
"I would burn it in a fire," Bauer responds.
It's unknown whether the money was destroyed.