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Money to Burn and a Boca Raton Home Part of Insider Trading Scheme

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Virginia attorney Matthew Kluger and New York stock trader Garrett D. Bauer were sentenced to 12 years and 9 years, respectively, for a 17-year insider trading scheme. Working together, the two netted $37 million in profits by trading ahead of more than 30 different corporate transactions based on confidential insider trading information that Kluger stole from multiple law firm employers.

Bauer spent more than $7 million of his share of the proceeds to purchase two properties – approximately $6.65 million for an Upper East Side condominium in New York and approximately $875,000 for a home in Boca Raton, Florida. The properties will now be forfeited as part of the settlement.

As law enforcement investigations intensified, Bauer instructed another co-conspirator to burn approximately $175,000 in cash that Bauer had paid him out of concern his fingerprints would be found on the money.

Both Kluger and Bauer had previously pleaded guilty to charges of conspiracy to commit securities fraud, securities fraud, conspiracy to commit money laundering and obstruction of justice.

“The severe sentences imposed today are a warning to anyone trying to game the financial markets for their own enrichment,” U.S. Attorney Fishman said. “Garrett Bauer and Matthew Kluger participated in one of the longest-running insider trading schemes ever prosecuted. Bauer traded on confidential information that Kluger obtained from his position of trust at major law firms and parlayed it into tens of millions of dollars in illicit profits. Today, both of them reap the punishment their conduct deserves.”

“Millions of investors have entrusted their life savings to the integrity of financial markets and the belief of a level playing field,” said Michael B. Ward, Special Agent In Charge of the Newark Division of the FBI. “Insider trading corrupts the process and tilts the playing field in favor of those privileged few with access to information not available to the public, and at the expense of unsuspecting and unknowing investors. It is important that those who manipulate that trust be held accountable in strictest accordance with the law.”

According to documents filed in this case and statements made in court:

Bauer and two co-conspirators – Kluger and Kenneth Robinson, 45, of Long Beach, N.Y. – engaged in an insider trading scheme that began in 1994 and relied on Kluger, a lawyer, to steal information from his employers and their clients.

Bauer admitted that as part of the scheme he traded ahead of more than 30 different corporate transactions based on inside information provided by Kluger.

Over time, Kluger worked at four of the nation’s premier mergers and acquisitions law firms. From 1994 to 1997, he worked first as a summer associate and later as a corporate associate at Cravath Swaine & Moore in New York. From 1998 to 2001, he worked at Skadden, Arps, Slate, Meagher & Flom in New York and Palo Alto, Calif., as an associate in their corporate department. From 2001 to 2002, Kluger worked as a corporate associate at Fried, Frank, Harris, Shriver & Jacobson LLP in New York. From Dec. 5, 2005, to March 11, 2011, Kluger worked at Wilson Sonsini Goodrich & Rosati (“Wilson Sonsini”) as a senior associate in the Mergers & Acquisitions department of the firm’s Washington office.

While at the firms, Kluger regularly stole and disclosed to Robinson material, nonpublic information regarding anticipated corporate mergers and acquisitions on which his firms were working. Early in the scheme, Kluger disclosed information relating to deals on which he personally worked. As the scheme developed, and in an effort to avoid law enforcement detection, Kluger took information which he found primarily by viewing documents on his firms’ computer systems.

Once Kluger provided the inside information to Robinson, Robinson passed it to Bauer, who then purchased shares for himself, Kluger, and Robinson in Bauer’s trading accounts. He sold the shares once the relevant deal was publicly announced and the stock price rose. Bauer gave Robinson and Kluger their shares of the illicit profits in cash – often tens or hundreds of thousands of dollars – that Bauer withdrew in multiple transactions from ATMs.

Bauer admitted that after Kluger joined Wilson Sonsini, the three conspirators took greater efforts to prevent detection of their insider trading scheme. Among other techniques, they used pay phones and prepaid cellular phones that they referred to as “throwaway phones” to discuss the scheme.

Bauer also admitted that after Robinson told him that the FBI and IRS had searched Robinson’s house and had asked questions about the illicit scheme, Bauer destroyed a prepaid phone, discarding the pieces in two separate trash cans at a New York McDonald’s restaurant.

In addition to the prison term, Bauer and Kluger were both sentenced to three years supervised release. As part of his guilty plea, Bauer also agreed to forfeit the contents of numerous trading and bank accounts he used to facilitate the scheme, as well as homes that he purchased with the proceeds. In total, the value of the property Bauer is required to forfeit is $21 million. Kluger agreed to forfeit $415,000.

Robinson pleaded guilty on April 11, 2011, to an Information charging him with one count of conspiracy to commit securities fraud and two counts of securities fraud.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.

Brazilian Igor Cornelsen to Pay $5.1 Million for Burger King Insider Trading

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Brazilian ex-banker Igor Cornelsen and his firm through which he made trades – Bainbridge Group – reaped illicit profits of more than $1.68 million by trading Burger King options based on confidential information ahead of the company’s September 2010 announcement that it was being acquired by a New York private equity firm, according to the Securities and Exchange Commission (“SEC”).

Cornelsen is now a resident of the Bahamas with a home in South Florida after holding high-ranking positions at several banks in Brazil before his retirement. He sought inside information from his broker Waldyr Da Silva Prado Neto by sending him e-mails with such masked references as, “Is the sandwich deal going to happen?” Prado was stealing the inside information from another Wells Fargo brokerage customer involved in the Burger King deal.

Cornelsen and Bainbridge Group agreed to pay more than $5.1 million to settle the SEC’s charges. The settlement is subject to court approval. The litigation continues against Prado, whose assets have been frozen by the court.

“Cornelsen shamelessly prodded Prado for details on ‘the sandwich deal’ and Prado happily obliged to satisfy his customer’s appetite for inside information,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit and Director of the Philadelphia Regional Office.

Sanjay Wadhwa, Deputy Chief of the Market Abuse Unit and Associate Director of the New York Regional Office, added, “Foreign investors who access the U.S. capital markets must play by the rules and not rig the market in their favor, otherwise they face getting caught by the SEC and paying a hefty price as Cornelsen is here.”

According to the SEC’s complaint filed last week in federal court in Manhattan, Cornelsen became Prado’s customer in 2008. On May 17, 2010, Prado sent Cornelsen an e-mail written in Portuguese that translates to, “Igor, if you are around call me at the hotel … I have some info … You have to hear this.”

Cornelsen called Prado at his hotel and they had a 10-minute conversation. Earlier that same day, Prado told a friend that he had knowledge of the impending Burger King deal. After talking with Prado, Cornelsen began trading out-of-the-money Burger King call options the very next day. Cornelsen had never previously traded Burger King securities.

The SEC alleges that Cornelsen continued trading Burger King options over that summer despite losing money in some instances. In August, Cornelsen sent Prado e-mails seeking assurances that ‘the sandwich deal’ was going to happen, and Prado responded with such statements as “Yes it’s going to happen” and “Everything is 100% under control.” Cornelsen then purchased additional Burger King call options.

Cornelsen took steps to minimize his connection to Prado by purchasing the Burger King call options in accounts held at brokerage firms other than where Prado worked.

The SEC alleges that after the public announcement of the Burger King deal, Cornelsen e-mailed Prado to inquire about the acquisition price. Upon learning the new per share price that would yield him substantial illegal profits, Cornelsen e-mailed back, “Wow! What a day!”

The SEC’s complaint charges Cornelsen and Bainbridge Group with violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3. The proposed final judgment orders them to jointly and severally pay $1,681,090 in disgorgement and $136,620.96 in prejudgment interest. Cornelsen is ordered to pay a $3,362,180 penalty. They neither admit nor deny the SEC charges. The proposed final judgment also enjoins them from future violations of these provisions of the federal securities laws.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.

SEC Charges Matthew Martoma of Boca Raton in $276 Million Insider Trading Scheme

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Hedge fund advisory firm CR Intrinsic Investors LLC, based in Stamford, Conn., its former portfolio manager Matthew Martoma, and a medical consultant for an expert network firm were charged by the Securities and Exchange Commission for their roles in a $276 million insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies. The illicit gains generated in this scheme make it the largest insider trading case ever charged by the SEC.

CR Intrinsic Investors LLC is an affiliate of SAC Capital Advisors, a firm owned by hedge fund manager Steven A. Cohen.

The SEC alleges that Mathew Martoma illegally obtained confidential details about the clinical trial from Dr. Sidney Gilman, who served as chairman of the safety monitoring committee overseeing the trial. Dr. Gilman was selected by Elan Corporation and Wyeth to present the final drug trial results to the public.

In phone calls that were arranged by a New York-based expert network firm for which he moonlighted as a medical consultant, Dr. Gilman tipped Martoma with safety data and eventually details about negative results in the trial about two weeks before they were made public in July 2008. Martoma then caused several hedge funds to sell more than $960 million in Elan and Wyeth securities in just over a week.

Dr. Gilman, who lives in Ann Arbor, Mich., where he works as a medical school professor, has agreed to settle the SEC’s charges and cooperate in this action and related SEC investigations. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Martoma and a non-prosecution agreement with Dr. Gilman. Martoma lives in Boca Raton, Fla.

According to the SEC’s complaint filed in federal court in Manhattan, Martoma first met Dr. Gilman through paid consultations arranged by the expert network firm. Dr. Gilman provided Martoma with material nonpublic information concerning the Phase II trial of the potential Alzheimer’s drug called bapineuzumab (bapi). They coordinated their expert network consultations around scheduled safety monitoring committee meetings, and during their phone calls they discussed PowerPoint presentations made during the meetings and Dr. Gilman provided Martoma with his perspective on the results. Dr. Gilman developed a personal relationship with Martoma, eventually coming to view Martoma as a friend and pupil.

The SEC alleges that Martoma caused hedge funds managed by CR Intrinsic as well as hedge funds managed by an affiliated investment adviser to trade on the negative inside information he received from Dr. Gilman. Although Elan and Wyeth’s shares rose on June 17, 2008, on the public release of top-line results of the Phase II trial, market participants were disappointed by the detailed final results issued on July 29, 2008.

Double-digit declines in Elan and Wyeth shares ensued. After Martoma was tipped, the hedge funds not only liquidated their combined long position in Elan and Wyeth of more than $700 million, but went on to hold substantial short positions in both securities. This massive repositioning allowed CR Intrinsic and the affiliated advisory firm to reap approximately $82 million in profits and $194 million in avoided losses for a total of more than $276 million in illicit gains.

According to the SEC’s complaint, Martoma received a $9.3 million bonus at the end of 2008 – a significant portion of which was attributable to the illegal profits that the hedge funds managed by CR Intrinsic and the other investment advisory firm had generated in this scheme. Dr. Gilman, who was generally paid $1,000 per hour as a consultant for the expert network firm, received more than $100,000 for his consultations with Martoma and others at the hedge fund advisory firms. Dr. Gilman also received approximately $79,000 from Elan for his consultations concerning bapi in 2007 and 2008.

The SEC’s complaint charges each of the defendants with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.

Dr. Gilman has agreed to pay more than $234,000 in disgorgement and prejudgment interest. He also agreed to a permanent injunction against further violations of the federal securities laws. The proposed settlement is subject to approval by the court, which also will determine at a later date whether any additional financial penalty is appropriate.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.

Rengan Rajaratnam Charged in Galleon Insider Trading

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The SEC today charged Rajarengan “Rengan” Rajaratnam for his role in the massive insider trading scheme spearheaded by his older brother Raj Rajaratnam and hedge fund advisory firm Galleon Management.

The SEC alleges that from 2006 to 2008, Rengan Rajaratnam repeatedly received inside information from his brother and reaped more than $3 million in illicit gains for himself and hedge funds that he managed at Galleon and Sedna Capital Management, a hedge fund advisory firm that he co-founded. In addition to illegally trading on inside tips, Rengan Rajaratnam was an active participant in his brother’s scheme to cultivate highly placed sources and extract confidential information for an unfair advantage over other traders.

“Our complaint against Rengan Rajaratnam tells a sad tale of a man who followed his brother down an illegal path of greed to its inevitable conclusion,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Rengan Rajaratnam profited handsomely from his brother’s insider trading activities, and he may have believed he wouldn’t have to pay a price for his involvement. But now he is learning the true cost of his participation in the most expansive insider trading scheme ever perpetrated.”

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Rengan Rajaratnam.

According to the SEC’s complaint filed in federal court in Manhattan, Rengan Rajaratnam repeatedly received valuable insider tips from his brother that he used for illegal trading in the securities of Polycom, Hilton Hotels, Clearwire Corporation, Akamai Technologies, and AMD. For example, in July 2007, he made substantial profits trading Hilton stock in his personal account based on a timely insider trading tip from Raj Rajaratnam that Hilton was about to be taken private. Rengan Rajaratnam quickly loaded up on Hilton stock, and the price of Hilton shares jumped more than 25 percent after the news became public. Rengan Rajaratnam cashed in his recently acquired position for an illicit profit of more than $675,000.

According to the SEC’s complaint, after Raj Rajaratnam tipped him about an upcoming transaction involving Clearwire Corporation in March 2008, Rengan Rajaratnam complained to his brother that certain nonpublic information they had used to begin accumulating a position in Clearwire stock was about to be reported by the media before they could establish a larger position. Rengan Rajaratnam nevertheless profited by more than $100,000 in his personal brokerage account and more than $230,000 for Galleon hedge funds based on trades in Clearwire securities.

The SEC’s complaint charges Rengan Rajaratnam with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment permanently enjoining Rajaratnam from future violations of these provisions of the federal securities laws, ordering him to disgorge his ill-gotten gains plus prejudgment interest, and ordering him to pay financial penalties.

The SEC has now charged 33 defendants in its Galleon-related enforcement actions, which have exposed widespread and repeated insider trading at numerous hedge funds and by other traders, investment professionals, and corporate insiders located throughout the country. The insider trading occurred in the securities of more than 15 companies for illicit gains totaling more than $96 million.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.