Bauer, Garrett - Inside Trader gets 9 years
Inside Trader, Garrett Bauer, Sentenced to 9 Years in Prison
By Walter Pavlo - Forbes - 6/05/2012
Today, Garrett Bauer (44) of New York, NY was sentenced to 9 years in prison after agreeing last December to plead guilty to charges of trading stocks based on confidential information related to mergers and acquisitions. Bauer was sentenced by U.S. District Judge Katharine Hayden in New Jersey, while U.S. Attorney, Paul Fishman of New Jersey, looked on from the gallery. Bauer’s source for the information was attorney Matthew Kluger (51), who worked at the law firm of Wilson Sonsini Goodrich & Rosati in Washington, DC. Kluger was sentenced by Judge Hayden to 12 years prison, within the federal sentencing guideline of 10-12 years, earlier in the day.
Some of the earliest information started flowing to Bauer in 1995, Bill Clinton was in his first term as president, when Lotus Development Corporation (Remember Lotus 1-2-3 and Lotus Notes) was purchased by IBM. Kluger, then an NYU Law School intern at Cravath Swaine & Moore, knew that the firm was working on a transaction that involved the purchase of Lotus. He passed that information on to an acquaintance of his, Kenneth Robinson, who was a mortgage broker in Long Island. Kluger explained the value of the information he had and Robinson knew a guy who knew a lot about trading stocks, Garrett Bauer.
Bauer and Robinson were close friends, but Bauer did not know or have any contact with Kluger. So the person trading on the information had no contact with the source of the information, while Robinson played the intermediary. Bauer’s role was to act as stock trader on the information, taking “orders” from Robinson and Kluger on the number of shares they wanted to purchase. Bauer also played the role of banker, paying taxes on the stock gains and then distributing the money, in cash, back to Robinson who would then pay Kluger. It was the beginning of an insider trading ring that would last 17 years.
In a series of interviews I had with Garrett Bauer, he provided a glimpse into the world of insider trading.
“At first, it was about the money,” Bauer said. ”When I started trading, I was broke and used credit card advances to make some trades. So Ken’s [Robinson's] tips were helpful at first, but the amounts [gains] were still small.”
“Over time, I had come up with my own day-trading strategies that made money by moving in and out of stocks throughout the day. That’s why I didn’t like Ken’s tips because they were not that accurate. I would have to hold stocks for longer periods of time with him…. sometimes it was months, when I was usually in a stock position for only a few minutes.”
The tips from Kluger represented incomplete information most of the time. Kluger would go into a document management system at the law firm and search through the subject lines of the documents to see what transactions were being worked on by the firm. He would never “click” on the document, because that would create an activity log that he had looked at the file. To further complicate his searches for information, some of the firms’ clients were given code names so as to prevent someone from overhearing or seeing documents that would otherwise specifically state the companies involved in a deal.
Kluger was always careful to only get information on those transactions that were worked on by other attorneys, never his own clients. It created further separation between the source and the trade. He would then pass what he knew on to Robinson through clandestine meetings, phone card calls or prepaid cellphone calls. Robinson would then pass the information on to Bauer who would do additional research to see if he could find out if the information had merit. At times, it meant enduring losses prior to a deal closing.
Bauer would place the trades for the group, with Robinson and Kluger usually wanting 50,000 – 100,000 shares of a company. Bauer on the other hand placed his own order, and those share purchases were in the hundreds of thousands, or millions, of shares that he would purchase over time. He was a trader.
However, Bauer was moving in and out of many stocks and was eventually using Goldman Sachs to clear his trades. In 2010, Bauer had traded over $8.38 billion in stocks. Within that volume, some of his trades involved the target companies given to him through Kluger/Robinson.
In fact, unknown to Bauer, Kluger had also been approached by the SEC in the past but they could never connect Bauer with Kluger through phone records or a relationship.
There had been a span of 6 years (1999-2005) when Kluger no longer had access to merger information and they all decided to quit while they were ahead. Bauer had then went on to become a successful trader and was earning a living as a day trader. Robinson had gotten married and started a family. Then Kluger called Robinson when he landed at Wilson Sonsini. They were going to get the band back together.
Bauer became a reluctant participant. His day-trading strategies did not fit with the hit and miss information he would get from Kluger/Robinson. So in 2010, Bauer backed out and told Robinson that he was not interested. However, the information kept coming from Kluger, so Robinson stepped up to take on Bauer’s old role as trader and banker. That caught the attention of the SEC and FBI.
When authorities went to question Robinson about a recent stock purchase, he got nervous and shortly after an initial meeting with the FBI, decided to cooperate. Robinson made a complete confession and agreed to tape conversations against his good friend, Garrett Bauer, and the lawyer, Matthew Kluger.
On recounting Robinson’s cooperation, Bauer said, “We were friends for over 20 years. I never would have thought Ken would have turned me in. I’m not saying we weren’t doing something wrong, but I just never thought him recording me was even possible.” But it was possible and Robinson got Bauer on tape confessing to the trading scheme as well as destroying evidence.
“I can still remember Ken telling me on the phone, ‘I’ll try to help you as much as I can.’ I never understood what he meant until the FBI showed up.”
On April 6, 2011, Garret Bauer heard the elevator open to his expansive 5,500 square foot apartment on 84th Street. He knew someone had entered his apartment but why would the doorman let someone in the building….at 6am?
“Garrett Bauer, where are you? FBI!,” came a voice down the hall. Over 20 agents filled his apartment and were scattered about 84th Street, which had been taped off between Lexington and 3rd Avenue.
Arrested and facing a magistrate, Bauer was confronted with evidence that his friend, Ken Robinson, had been cooperating with authorities. Shortly after this revelation, Bauer told his attorney, Michael Bachner, to enter into plea discussions with the government. That deal was finalized in December 2011.
Since agreeing to plead guilty, Bauer has been on a one-man mission to tell people about his unfortunate situation. “I’ve had over 147 speaking events since last summer,” Bauer said. He has used personal appearances and Skype to reach as many people as he could with his cautionary tale. Yale, Harvard, MIT and Dartmouth are just a few of the universities where he has spoken. “I want to let them know what can happen, and hopefully they can avoid all this,” referring to his prison term and the forfeiture of about $21 million in bank accounts and his $8 million Manhattan apartment. He has little to show now for his many successful, legal trades.
As I was speaking to Bauer, he went to a panel housing a stereo system for the apartment and put on a song by Glass Pear, “Last Day of Your Life.” The speakers embedded in the ceiling throughout the apartment came to life. “I do have this feeling that I am about to die. I just can’t believe this is happening to me,” Bauer said as he sat on his couch, laid his head back and soaked in the lyrics:
If this was the last day of your life
What would you do to make things right?
Cause this is the last day of your life
Who you gonna call to make things right?
He tried over the past 8 months to right a wrong of 17 years by sharing his story with others, but he ran out of time. Garrett Bauer is a good person who was active in charities involving sick children and feeding the hungry of New York for more than 20 years. However, he admits that he made some bad choices along the way and he is paying for those now. Garrett Bauer is due to report to federal prison in mid-July, about the same time as his 45th birthday. Kenneth Robinson, his old friend and government informant, is to be sentenced later today.