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Lawyer Receives Longest Insider Trading Sentence, 3rd Cir Affirms

By Gabriella Khorasanee, JD on July 12, 2013 | Last updated on March 21, 2019

Insider trading has a new record sentence — the new holder? An attorney.

Over a seventeen-year period, attorney Matthew Kluger conspired with two others: Garrett Bauer, a stock trader and Kenneth Robinson, a middleman who passed insider information from Kluger to Bauer . Kluger and Robinson intended for the scheme to be a modest one, instructing Bauer to make purchases and sales in small amounts. However, Bauer began trading in excess of the amounts the trio had predetermined. During the course of the conspiracy, the scheme net an amount exceeding $34 million, with Bauer reaping the majority of the profits.

When the scheme was exposed, Robinson cooperated with the investigation leading to the arrests of Bauer and Kluger. On December 14, 2011, Kluger plead guilty to four charges for obstruction of justice, money laundering, conspiracy to commit securities fraud and securities fraud, all in violation of the U.S. Code.

This week, the Third Circuit affirmed Kluger's twelve-year sentence, "the longest insider-trading sentence ever imposed." Here's why...

Sentencing Guidelines Calculation Was Proper

On appeal, Kluger maintained that the District Court erred in its application of U.S.S.G. §2B1.4, when it attributed all of the scheme's monetary gain to Kluger, even though he only received a small fraction of the gains. Kluger argued that the court should have held an evidentiary hearing to determine whether he could have reasonably foreseen that Bauer would trade in excess of the amounts agreed upon.

The Third Circuit affirmed the District Courts use of U.S.S.G. §2B1.4 because the notes to the guidelines clearly state that in the case of insider trading by an attorney, the court will look at the increase in value the defendant realized, as well as the amount realized by "persons acting in concert with the defendant or to whom the defendant provided inside information." Accordingly, the District Court was correct in attributing Bauer's gains to Kluger -- even though Bauer's gains were not shared with Kluger.

The Third Circuit found that Kluger's argument that Bauer's actions were not reasonably foreseeable (a) did not apply; and (b) even if it did apply, people who provide insider information are responsible for the gains of the people they tip off.

The Length of the Sentence Is Reasonable

Kluger's main contention on appeal is that the twelve-year sentence was unreasonable, especially considering the disparity between his sentence, and Bauer's nine-year sentence, as well as other sentences of defendants convicted of insider trading in the same jurisdiction.

The Third Circuit did not agree. The court especially took note of the fact that Kluger was an attorney who failed his oath to uphold the law, that the scheme started before Kluger was even an attorney and the systematic regularity of the scheme that spanned seventeen years. Furthermore, Bauer had mitigating circumstances such as extensive community service pre- and post-arrest, that Kluger simply did not have.

This case will surely be a lesson to all current, and potential insider traders -- especially attorneys. The Third Circuit is sending a message that it wants to deter insider trading, and if you are going to engage in such illegal activities, you must be responsible for all gains as a result of that activity.

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