A corporate lawyer and a trader were charged Wednesday with running a 17-year conspiracy to trade on secrets about corporate mergers stolen from three of the nation's most prominent law firms, in one of the largest U.S. insider trading cases on record,

Matthew Kluger, who until last month was a lawyer at Wilson Sonsini Goodrich & Rosati PC, and the trader Garrett Bauer were accused of reaping more than $32.2 million of illicit profit by trading on tips about upcoming mergers and acquisitions.

Prosecutors said Kluger passed tips to an unnamed co-conspirator about mergers such as Oracle Corp's takeover of Sun Microsystems Inc and Adobe Systems Inc's takeover of Omniture Inc. The co-conspirator would then tip Bauer, who would make trades for all three of them based on the inside information, prosecutors said.

In a complaint filed with the federal court in Newark, New Jersey, and built in part on phone wiretaps, the government said Kluger also passed tips from his earlier jobs at Cravath Swaine & Moore LLP and Skadden, Arps, Slate, Meagher & Flom LLP.

Investigators said the plan was hatched after an Atlantic City, New Jersey, meeting, in which Bauer agreed to use gambling as a cover story to explain cash withdrawals he was making to funnel illegal profits to Kluger.

They also said that after the FBI searched the co-conspirator's home on March 8, Kluger and Bauer -- sometimes called Mr G -- became nervous, and began destroying cellphones, computer records and other evidence.

As long as Mr. G keeps his mouth shut and I keep mine and you keep yours, I don't think they're gonna find enough of anything, the government quoted Kluger as saying on a March 17, 2011 cellphone call with the co-conspirator.

According to court papers, Kluger and Bauer invested more than $109 million in the scheme, which involved trades dating as far back as Johnson & Johnson's 1994 takeover of Neutrogena Corp and International Business Machines Corp's takeover of Lotus Development Corp the next year.

Prosecutors also said Bauer in late 2009 spent more than $7 million of proceeds from the scheme to buy two homes: a $6.65 million condominium on Manhattan's Upper East Side, and an $875,000 home in Boca Raton, Florida.

Kluger and Bauer were charged in a 17-count criminal complaint, including 11 counts of insider trading, four counts of obstruction of justice, conspiracy to commit insider trading, and conspiracy to commit money laundering.

The U.S. Securities and Exchange Commission filed related civil charges.


Kluger lives in Oakton, Virginia, and Bauer in New York. It is unclear whether they have lawyers for their defense.

Kluger did not return a call to his home seeking comment. Bauer could not immediately be reached for comment. Wilson Sonsini did not immediately return requests for comment. Representatives of Cravath and Skadden had no immediate comment.

The case against Kluger and Bauer is one of the largest in U.S. history based on the amount of illegal profit, a sum that could grow as investigators probe further, a person familiar with the case who was not authorized to talk publicly said.

Wednesday's arrests follow dozens of others since October 2009 in connection with federal allegations of insider trading focused on hedge funds.

One-time billionaire Raj Rajaratnam, who founded the hedge fund firm Galleon Group, is on trial in Manhattan in Wall Street's biggest insider trading case in two decades, accused of reaping $45 million of illicit profit.

According to the complaint, Kluger worked from December 2005 until this March 11 as a senior associate in Wilson Sonsini's office in Washington, D.C., where his annual salary was about $290,000.

Kluger worked at Cravath from 1994 to 1997, and at Skadden from 1998 to 2001, the complaint said.

Prosecutors said Bauer worked at a variety of trading firms, most recently at Lighthouse from about June 2009 through roughly August 2010.

Lighthouse also once employed the broker Michael Kimelman, who was arrested in 2009 in connection with the hedge fund insider trading probe. Kimelman has been represented in that case by lawyers at Wilson Sonsini, court records show.

U.S. Attorney Paul Fishman in New Jersey, and officials from the FBI and the SEC are expected to hold a press conference on the arrests later Wednesday.

The case is U.S. v. Bauer et al, U.S. District Court, District of New Jersey, No. 11-mag-03536.

(Reporting by Jonathan Stempel in New York; Additional reporting by Dena Aubin, Nadia Damouni and Matthew Goldstein; editing by Dave Zimmerman)