Insider traders are still trying to get it right

March 20, 2014

Sylvester Stallone once told an interviewer about advice he got from Carl Icahn when they were discussing investments. “The dumbest guy on Wall Street is smarter than you,” Icahn warned him. “Keep your money in the bank.”

The stories behind the scores of insider trading convictions since 2007 make me think Icahn might have been wrong.

Three more Wall Street types were busted this week for running an insider trading scheme that spanned five years and involved over a dozen corporate secrets. Their modus operandi — passing information from lawyer to middleman to trader — was almost identical to the one used by Matthew Kluger, Kenneth Robinson, and Garrett Bauer, who were arrested in 2011.

In a cinematic twist on detection avoidance, the middleman in this week’s case destroyed evidence by eating the Post-it notes and napkins on which he wrote company names, according to the criminal complaint. Apparently this didn’t work any better than the throwaway phones Kluger, Robinson, and Bauer used when they attempted to avoid detection.

The Kluger/Robinson/Bauer case might be worth some study for the next group of guys who want to cheat honest investors and not get caught.

Kluger, if you remember, worked at several top-tier law firms over a 17-year career, stealing information about M&A deals almost from the moment he started as a summer associate at Cravath, Swaine and Moore in 1994. He had only one encounter with Bauer, an independent trader who worked mostly from his Upper East Side apartment. The men plotted their conspiracy, and then took great pains not to be connectable. Robinson — a mortgage banker, like this week’s middleman — was friends with both men and acted as their go-between for 17 years, until he was caught.

The same SEC team that identified this week’s co-conspirators cracked the Bauer case in 2010. They used complex statistical analysis to scan the terabytes of trading data they legally access every day to help keep our markets clean.

As Daniel Hawke, chief of the Market Abuse Unit in the SEC’s Division of Enforcement, put it, “nobody hits the lottery that many times,” referring to the many brilliantly-timed trades Bauer made from Kluger’s inside information. Scanning all of Bauer’s trading records, the SEC was able to zero in on Robinson as a likely conduit of inside information between someone at Wilson Sonsini Goodrich & Rosati — where Kluger was then working — and Bauer.

The SEC handed the case to the FBI, which used secret grand jury subpoenas to build a criminal case against Robinson, the go-between. They called him the “bagman” — the guy who passes the cash between others, earns the least from the scheme, and has the most to lose by not cooperating. They surprised him at home with a search warrant early one morning in March 2011. They laid out their evidence during an all-day meeting, then suggested he get a good lawyer.

He retained a former federal prosecutor, who advised him to cooperate. Several days later, they walked into the same U.S. Attorney’s office in New Jersey that filed this week’s case. Robinson described the scheme for prosecutors and the FBI, naming Kluger. He provided other details that helped expedite the prosecution and win the longest-ever sentence for insider trading: the 12 years given to Kluger.

Kluger and Bauer were sentenced in June 2012 and entered prison that summer. Kluger’s sentence surpassed not only Bauer’s, at 9 years, but even the 11 years given to Raj Rajaratnam, who was running a crooked multi-billion-dollar hedge fund. (SAC Capital’s Michael Steinberg, who was convicted in December, and his former colleague, Mathew Martoma, who was convicted last month, are scheduled to be sentenced in April and June. Neither cooperated with the prosecution — decisions that can’t be held against them, but won’t help at sentencing.)

In the Bauer case, even Robinson — the cooperating bagman — was sentenced to prison. During his sentencing, Judge Katharine Hayden acknowledged his help in convicting the other two, but still pointed out what some folks on Wall Street never seem to understand: insider trading is a serious crime, with real victims. “It’s the kind of crime,” she said, “where one can be thoroughly an outlaw and thoroughly pass for a non-outlaw.” She gave Robinson, who is married with a family, 30 months. He is scheduled for release in August.

If this week’s charges against Steven Metro, the lawyer; Vladimir Eydelman, the broker; and their “bagman” are true, Metro is in almost exactly the same position as Kluger. As the law firm source, Metro committed the worst crime, took home far less than Eydelman — he “reinvested” his profits with him, in fact — and may be facing the most time in prison. The bagman’s identity will likely become public over the next few days, and it will be interesting to see what kind of deal his lawyer cut for him. If it wasn’t a non-prosecution agreement, he’ll be at the mercy of the judge, who will be free to do whatever he or she wants with any recommendation given by prosecutors.

The major lesson from practically all the insider trading conspiracies over the years — from Dennis Levine and Ivan Boesky in 1986, to Rajaratnam, Bauer, Steinberg, and Martoma — is that somebody is going to rat out somebody else.

Given this week’s case, a too-clever white-collar type looking to avoid the inconvenience of a lengthy prison sentence might now think there’s an easy, albeit sadistic solution: lace the bagman’s Post-It notes and napkins with cyanide.

But there’s an easier solution. Lots of people who work for government salaries to protect honest investors are smarter than you. Put your money in the bank. And go find another job.


PHOTOS: Former SAC Capital Advisors portfolio manager Mathew Martoma walks out of the courthouse in downtown Manhattan, New York, February 6, 2014.  REUTERS/Eduardo Munoz 

Galleon hedge fund founder Raj Rajaratnam departs Manhattan Federal Court after his sentencing in New York October 13, 2011. REUTERS/Lucas Jackson 

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