At 6:50am on April 6, 2011, authorities knocked on Matthew Kluger’s door, slapped on handcuffs, and drove him to the FBI office in Manasass, Virginia. That marked the end of what is possibly the longest-running insider trading scheme ever prosecuted.
Kluger, a mergers and acquisitions lawyer, was the information source in a three-man insider trading ring that managed to elude authorities for 17 years. And over those 17 years, the scheme raked in something like $37 billion in illegal profits.
The plan was simple. Kluger had access to nonpublic information about upcoming corporate mergers. He gave that information to a middleman…an old friend named Kenneth Robinson. Robinson would deliver the information to Garret Bauer, a friend and day trader. Bauer would buy shares of the company, and then sell at a profit when the deal made the news. Then he would withdraw cash from various ATMs in $50 bills, and deliver the cash payments back to Robinson, who would then split the money with Kluger.
Over the course of the scheme, Kluger stole information on corporate deals from four law firms that he worked for, and that information ended up being used for 30 illegal transactions between 1994 and 2011. The first trade came in front of a proposed merger of QVC and CBS. The three made about $8,000 each. From there the profits got bigger. The biggest payout came in April 2009 with the purchase of shares of Sun Microsystems ahead of news that the company would be bought by Oracle. The profit amounted to $11.4 million.
And they managed to operate under the radar. Kluger learned how to search titles of documents to figure out how far a merger had progressed without having to actually open a document and set off a red flag. They used disposable, pre-paid cell phones to communicate, which they would destroy. They met on street corners to exchange cash. They were disciplined, and they were the only players.
Still, authorities took notice a couple of times. At one point an SEC lawyer called Kluger to ask him about three suspicious transactions, but nothing ever came of it. Then in 2007 the SEC examined Bauer’s trading activity.
In 2009 an investigator put Robinson’s and Bauer’s trades together. Authorities knew they had a shared source…and when Robinson bought shares of 3Com on his own ahead of an acquisition by Hewlett-Packard, it drew them right to the law firm where Kluger was working. The FBI raided Robinson’s house on March 8, 2011. Within days, he gave up his partners and agreed to secretly record his conversations with them.
It wasn’t until the FBI laid out their case against him that Matthew Kluger found out that he had been duped…sort of. He thought that the three were splitting profits equally all along. In reality, Bauer kept more than 90% of the profits.
Over 17 years, Kluger never made more than $60,000 on a trade. All told, he made less than $1 million. Bauer made around $32 million.
It has to sting to find out that your partner in crime manipulated you for information. As Kluger told Bloomberg, “Maybe you want to laugh and say of course there’s no honor among thieves. But even when you’re doing something you’re not supposed to do, I trusted that they were honoring the commitments they had made”.
When he was arrested, Kluger couldn’t afford to hire an attorney. And while he didn’t make a lot of the profit, he got a lot of the sentencing. Robinson will serve 27 months. Bauer will serve 9 years. Kluger got 12 years…the longest term ever imposed for an insider trading conviction.
It seems Kluger was wrong: there is no honor among thieves…especially thieves on Wall Street.