By mid-March, as the government tells it, Matthew H. Kluger knew the FBI was closing in.
As a lawyer for three of the nation’s premier corporate law firms, most recently in the Washington office of Wilson Sonsini, he had allegedly stolen secrets that yielded tens of millions of dollars of insider trading profits. Now he was trying to eliminate the evidence.
Out went his computer, and his iPhone.
“Those are gone. I mean history,” he allegedly told a friend and co-conspirator.
But he was still worried.
“If they start looking at me and look at my bank records and all that other stuff . . . it could get ugly,” he said.
Sure enough. On Wednesday, the government dispatched any notion that law firms are always bastions of probity and discretion, charging that since the mid-1990s Kluger had tapped into his firms’ computer networks to extract and trade on confidential information about deals involving such blue-chip companies as Oracle, Intel and Hewlett-Packard.
Along with financial crimes spanning 17 years, he and a New York trader named Garrett D. Bauer are accused of engaging in a panicked cover-up that they discussed at length in telephone conversations with a third, unnamed conspirator, the alleged middleman.
In a March 17 phone call, according to a transcript of a recording, Kluger implored the middleman to get rid of a mobile phone that linked the two of them.
“I really would like to see this phone go bye-bye ASAP,” he said. “Do you want this to be our undoing?”
Worried that his fingerprints were on $175,000 in cash, Bauer allegedly urged the middleman to burn the money.
The middleman suggested that they launder the money instead — in a washing machine.
Kluger, 50, of Oakton, Va., and Bauer, 43, a New Yorker, were arrested Wednesday.
Kluger appeared in federal court in Alexandria and was being detained until a bail hearing Friday, said Rebekah Carmichael, a Justice Department spokeswoman. Bauer was being held in Newark.
An attorney for Bauer said it was too early to say how Bauer would respond to the charges. William J. Davis of Scheichet & Davis described him as “quite a pleasant fellow, very nice, quite gentle,” adding that Bauer “is in a bit of a difficult situation right now.”
Government officials were unable to identify an attorney for Kluger, and no one returned a message left at his home.
The two face criminal prosecution by the U.S. attorney for New Jersey and civil charges from the Securities and Exchange Commission.
A spokeswoman for Wilson Sonsini Goodrich & Rosati, the law firm where Kluger was until recently employed as a $290,000-a-year senior associate, said the firm was shocked to learn of the charges. The firm is giving its full support to the investigation, spokeswoman Courtney Dorman said in a statement.
The charges were the latest in a federal crackdown on insider trading that has nabbed hedge fund traders, management consultants, a former board member at Wall Street powerhouse Goldman Sachs and, recently, a Food and Drug Administration chemist accused of trading on advance knowledge of drug approvals.
Before embarking on a legal career, Kluger spent seven years in “automobile retail,” ultimately managing a Toyota dealership in California, according to a Wilson Sonsini bio.
He later gained a place in — and is accused of pilfering secrets from — the high priesthood of corporate law firms, including the New York-based firms Cravath Swaine & Moore and Skadden, Arps, Slate, Meagher & Flom.
This is how the government told its yet-to-be proved side of the story in court filings:
It began in 1994, when Kluger was a law student at New York University and a summer associate at Cravath. He realized that his job gave him access to potentially lucrative information. He asked his friend, the middleman, to help find people who would buy and sell stocks based on his tips.
The middleman enlisted Bauer.
Kluger provided the tips, the middleman conveyed them, Bauer placed the trades, and the middleman collected a share of the winnings for himself and Kluger.
In the early days, Bauer and the middleman met in Atlantic City, where gambling would provide an alibi for Bauer’s cash withdrawals. At first, Kluger forwarded tips about deals that he was working on. But as the scheme progressed, he took care to trade on other lawyers’ deals, according to court documents.
In the 1990s, the trio traded on advance knowledge of mergers such as Johnson & Johnson’s acquisition of Neutrogena, IBM’s with Lotus Development and Tivoli Systems, and America Online’s purchase of MovieFone.
At the end of the 1990s, the three broke off their dealings, afraid that they could get caught. But they resumed after Kluger joined the Washington office of Wilson Sonsini in 2005.
To cover their tracks, they communicated using throw-away mobile phones, new ones for each deal. Kluger tapped into the firm’s document management system for information on pending mergers. Instead of actually opening the documents, he scanned the titles, intending to avoid leaving a digital trail.
Since Kluger joined Wilson Sonsini, where he specialized in mergers and acquisitions, the trio invested about $109 million trading on 11 corporate transactions, netting profits of $32.4 million, the government alleges.
Bauer bought a $6.65 million condominium on New York’s Upper East Side and a home in Boca Raton, Fla.
But their world was rocked in early March, when the FBI and Internal Revenue Service searched the middleman’s home.
Subsequently, phone calls between the middleman and his two associates were recorded consensually, the government said, which in legal parlance means at least one participant agreed.
In some of the calls, according to excerpts in court documents, Kluger mused about the possibility that the middleman would “flip” and help the government, even as Kluger made statements that the government can now use against him.
Kluger allegedly said he could never get a good deal from the government. “I couldn’t get immunity,” he said. “I would have to do time.”
In a March 18 call, Bauer allegedly described his panic after hearing about the FBI search. “I went right up to my apartment and I broke the phone in half and went to McDonald’s and put it in two different garbage cans.”
Musing about how he might explain his large cash withdrawals, he said: “I don’t know. I will say I bought prostitutes if it comes down to it.”
Bauer allegedly urged the middleman to spare no expense hiring lawyers and promised to make it up to him later.
“I’m sitting with over $20 million in the bank,” he said.