Insider Trading Gets Comic Book Treatment from SEC

April 11, 2011

Here we go again. Yet another high-profile, sexy, insider trading case that involves years and years of allegedly illegal activity - all of which went unnoticed by our dogged Wall Street cops.  It's no longer about the months or years it takes to catch the bad guys; no, now the metric is a decade-long yardstick.  

In heralding yet another of its belated prosecutions, the Securities and Exchange Commission ("SEC") wants to make sure that what they lacked in speed, they will make up in self-serving publicity.  We get the full Spin (wash, rinse, and dry cycles) with the filing of the Complaint in Securities and Exchange Commission v. Matthew H. Kluger and Garrett D. Bauer, Case No. 11-cv-1936 (D. N.J. April 6, 2011).  

Press Releases Galore

The SEC's press campaign starts off with a standard Press Release: SEC Charges Corporate Attorney and Wall Street Trader in $32 Million Insider Trading Ring (April 6, 2011), which informs us that:  

The SEC alleges that Matthew H. Kluger, who formerly worked at Wilson Sonsini Goodrich & Rosati, and Garrett D. Bauer did not have a direct relationship with each other, but were linked only through a mutual friend who acted as a middleman to facilitate the illegal scheme. Kluger and Bauer communicated with the middleman using public telephones and prepaid disposable mobile phones in order to avoid detection. According to the SEC's complaint, Kluger accessed information on 11 mergers and acquisitions involving the law firm's clients and then tipped the middleman. In at least nine instances, the middleman passed the information on to Bauer, who illegally traded for illicit profits totaling nearly $32 million.  

Not content with just one press release, the SEC provides an additional Litigation Release: SEC CHARGES CORPORATE ATTORNEY AND WALL STREET TRADER IN $32 MILLION INSIDER TRADING RING .

Of course, if you prefer to dispense with all the chest thumping verbosity of the press releases, you can go to the horse's mouth and read the 22-page SEC Complaint

Ah, but wait. We're not done felling trees for paper or clogging up the Internet with content. 

If you visit the FBI's website , you will find yet another press release: Attorney and Trader Charged in New Jersey in $109 Million Insider Trading Scheme.

Not surprisingly, that FBI item points you yet another press release from the United States Attorney for the District of New Jersey: Attorney and Trader Arrested, Charged with Trading on Inside Information Stolen from Three Preeminent Law Firms. More Than $109 Million in Illegally Traded Shares Netted More Than $32 Million in Last Five Years of Decades-Long Scheme. Wow, quite a lengthy title and subtitle - perhaps setting the stage for a widescreen release?  

The US Attorney/FBI press release explains that  

A professional stock trader and an attorney who formerly worked as a corporate associate at three prominent, international law firms were arrested today on charges arising from their alleged participation in a long-term insider trading scheme that netted at least $32 million in illicit profits, New Jersey U.S. Attorney Paul J. Fishman announced.  

Garrett D. Bauer, 43, of New York, and Matthew H. Kluger, 50, of Oakton, Va., are both charged in a criminal complaint with one count of conspiracy to commit securities fraud, one count of conspiracy to commit money laundering, and two counts each of obstruction of justice. Bauer and Kluger are also each charged with nine counts and 11 counts of securities fraud, respectively. Both defendants were arrested this morning at their residences by FBI and IRS agents. Bauer is expected to appear this afternoon before U.S. Magistrate Judge Mark Falk in Newark federal court. Kluger is expected to appear this afternoon before U.S. Magistrate Judge Theresa Carroll Buchanan in Alexandria, Va., federal court.  

The complaint also seeks the forfeiture of over $32 million, Bauer's real property in New York and Boca Raton, and the contents of a number of bank and trading accounts allegedly used to facilitate the scheme.  

Two Sides of the Same Coin?

Doesn't seem like there's a whole lot of difference between what the folks at the SEC are pursuing and what the folks at the Department of Justice ("DOJ") are prosecuting.  Frankly, it all stems from the exact same conduct but for the fact that some of the charges are "civil" (and are in the SEC's civil court case) and some of the charges are "criminal" (and are in the DOJ's criminal case).  Without question, a lawyer will explain to you that there are different burdens of proof for civil cases (a mere preponderance of the evidence) versus criminal cases (beyond a reasonable doubt); and, yes, the civil and criminal charges stem from different statutes, rules, and regulations.  Nonetheless, a double dip is a double dip.  


Among the things that perplex me is why Congressional leaders are holding this country hostage over last-minute budget talks when every day, year after year, the House and Senate have been confronted with unending examples of government waste and inefficiency - not the least of which are these overlapping civil actions and criminal prosecutions.  Notwithstanding the jurisprudence for separate charges, the  costly allocation of human resources to largely redundant enforcement/regulatory work is absurd. 

The double-talk from the bureaucrats in defense of these separate investigations and prosecutions is little more than protecting one's turf and building even taller silos.  And don't for a minute be fooled by the suggestion that there's a task force or that there is cooperation between and among various regulators and prosecutors. It's all about competition and grabbing the headlines. This waste of resources is highlighted by the proliferation of too many self-serving press releases taking up the time of too many folks who could be doing something else - or perhaps better employed in the private sector.  

Clearly, the US taxpayer is not getting the best bang for the buck when regulators fail to prudently triage their caseload.  And let's get down and dirty here.  If all these joint ventures and cooperative arrangements are so effective, then why did it take decades to catch Kluger and Bauer? Do you really want me to go into the whole Madoff fiasco too?

A Cavalcade of Regulators and Prosecutors

Just to put some startling facts before you, consider how many folks are actually involved in the civil and criminal sides of the Kluger and Bauer matters.  

According to the DOJ Press Release:  

U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Michael B. Ward in Newark, for the investigation leading to today's arrests and Complaint. He also thanked special agents of the IRS, under the direction of Special Agent in Charge Victor W. Lessoff, and the U.S. Securities and Exchange Commission's Market Abuse Unit and Philadelphia Regional Office, under the direction of Daniel M. Hawke.  

The government is represented by Assistant U.S. Attorneys Matthew E. Beck of the U.S. Attorney's Office Economic Crimes Unit and Judith H. Germano, Chief of the Economic Crimes Unit, in Newark.  

The SEC's Press Release states that:  

The SEC's investigation was conducted by Colleen K. Lynch, David W. Snyder and John S. Rymas, members of the Market Abuse Unit in the Philadelphia Regional Office. G. Jeffrey Boujoukos and Scott A. Thompson are handling the litigation.  

The SEC brought this enforcement action in coordination with the U.S. Attorney's Office for the District of New Jersey. The SEC also appreciates the assistance of the Federal Bureau of Investigation, the Financial Industry Regulatory Authority and the Options Regulatory Surveillance Authority.  

Moreover, the SEC Complaint lists the following attorney's as "Counsel of Record":  

  1. Daniel M. Hawke
  2. Elaine C. Greenberg
  3. G. Jeffrey Boujoukos
  4. Scott A. Thompson
  5. Michael J. Rinaldi
  6. Colleen K. Lynch
  7. David W. Snyder

Presumption of Innocence

To the credit of most FBI, US Attorney, and Department of Justice press releases, after announcing that individuals have been named in criminal Complaints or Indictments, we usually see an important disclaimer.  In the US Attorney press release cited in the Kluger and Bauer case, we are reminded that  

The charges and allegations contained in the complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.  

In keeping with its own wrong-minded tradition, there is no such disclaimer in any of the SEC's cited press releases. Sure, it's a minor concession but, hey, if you're going to load up in the press against defendants / respondents, you think you might just find a way to add a line that provides the constitutional balance?  

Comic Book Regulation

Then there's the other aspect of this matter that annoys me.  Visit the SEC's Press Release and you'll see a cartoon illustration.  

Chart: Tracking
the Trades 



If you follow through on the link, you'll see a "Full Size" version of this cartoon that shows a sitting figure (labelled as the Source/Matthew H. Kluger) and two standing figures on telephones labelled as "Middleman" and "Trader/Garret D. Bauer).  This illustration supposedly demonstrates how 11 alleged tips passed from Kluger to the Middleman and the Trader, and then how "Cash" came back via two green arrows. 

Again, nowhere on this page is any suggestion that the illustration is merely an unproven allegation and that the defendants are presumed innocent until prove guilty in a court of law.

More to the point - seriously - have things gotten so desperate that the regulation of Wall Street is reduced to cartoons?  Do we truly need to illustrate, comic book style, how a tip goes from one person to another and another, and how money comes back downstream?  Anyone recall seeing a similar illustration for a drug buy or bank robbery?


A comic strip showing how one citizen's attempt to blow the whistle on Wall Street fraud progresses from his discovery  of the fraud, to his failed efforts to get a regulator's attention, and ends with the stock market crash caused by the undetected fraud.

Mark Harrypolos was doing his financial homework and noticed something amiss. He had uncovered what he thought was a massive stock market fraud. Being a good citizen, Harrypolos decided to call the authorities.


Harrypolos was afraid that if he didn't act soon, a lot of folks would wind up losing their life savings. He was afraid that this fraud was so big that the market could crash. Harrypolos was really busy at work but he started to call every regulator. They put him on hold. They put him into voicemail


By the time anyone took Harrypolos seriously, it was too late. The market had crashed. Everyone was wiped out. The SEC issued two press releases about the crash. The FBI issued a press release about its arrest of the bad guy that Harrypolos had uncovered. The Department of Justice issued press releases about the arrest, the complaint, the indictment, and the verdict.