A lawyer and a trader were accused by federal prosecutors of running a 17-year conspiracy to trade on corporate merger secrets stolen from three of the nation's most powerful law firms, in one of the largest U.S. insider trading cases on record.

Prosecutors accused Matthew H. Kluger and Garrett D. Bauer of reaping more than $32.2 million from trading on tips about upcoming mergers and acquisitions that Kluger learned as a lawyer at Wilson Sonsini Goodrich & Rosati PC, the pre-eminent firm representing Silicon Valley tech companies.

Kluger also regularly leaked information he had learned when he worked previously at two other law firms, Cravath Swaine & Moore LLP and Skadden, Arps, Slate, Meagher & Flom LLP, prosecutors said.

Wednesday's criminal charges do not cover trades that may have been made at that time. The charges come amid a broad government crackdown on insider trading, including the criminal trial of Galleon Group hedge fund founder Raj Rajaratnam and last month's charges that a U.S. Food and Drug Administration chemist traded on insider information about drug approvals.

Questions are also surfacing about David Sokol, a former top deputy to Warren Buffett who quit Berkshire Hathaway last week amid questions over his trading in stock of a company that Berkshire later agreed to buy.

Federal prosecutors in New Jersey said Kluger, 50, passed tips to an unnamed co-conspirator about Oracle's takeover of Sun Microsystems, Adobe Systems' purchase of Omniture, Hewlett-Packard's takeover of 3Com and Intel's purchase of McAfee.
The co-conspirator would then tip Bauer, 43, who would make trades for all three based on the tips, according to the complaint, which relies on many recorded phone calls.

In one call on March 28, Bauer was said to have discussed how to dispose of $175,000 of cash that contained his fingerprints, and which he had given the co-conspirator.

"Somebody did say, 'Why don't you just run it through a dish-washing machine?" the co-conspirator said.

"Well, I, I don't know," Bauer is said to have responded. "I mean, I've seen that in the movies."

More than $109 million was invested in the purported scheme, prosecutors said.

"According to the complaint, the defendants exploited Kluger's access to sensitive, confidential information to make trading profits a sure thing," U.S. Attorney Paul Fishman in New Jersey said. "This kind of cheating corrodes confidence in our markets and swindles those who play by the rules."

The U.S. Securities and Exchange Commission filed civil charges against Kluger, of Oakton, Va., and Bauer, a New York resident.
Kluger left Wilson Sonsini on March 11, prosecutors said. The firm built much of its reputation representing Silicon Valley technology companies.

Kluger appeared Wednesday afternoon at a brief hearing in federal court in Alexandria, Virginia. He surrendered his passport and was ordered detained pending another hearing scheduled for Friday. Bauer was expected to appear in a separate afternoon hearing in Newark federal court.

17 Criminal Counts
Prosecutors said Bauer worked mainly at three proprietary trading firms in the period covered by the complaint, most recently at Lighthouse Financial Group and previously at JAG Trading LLC in Bloomfield Hills, Mich.

The criminal complaint also contends Bauer in 2009 spent $7.5 million of illicit proceeds on a condominium on Manhattan's Upper East Side and a home in Boca Raton, Fla.

"I'm shocked to hear everything that's gone on," said Craig Bauer, who said he is Garrett Bauer's brother, in a telephone interview. Craig Bauer is managing member of JAG, according to that firm's website.

Kluger and Garrett 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 case 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, said a person familiar with the case who was not authorized to talk publicly.

"We all have very, very careful procedures, said Garrett Moran, chief operating officer of the private equity group at Blackstone Group LP, at the Reuters Global Mergers and Acquisitions Summit. "You just don't do a trade unless you ask your compliance department in advance."

The case follows dozens of other U.S. insider trading prosecutions since October 2009, when Rajaratnam was arrested. Rajaratnam, a one-time hedge fund billionaire, is on trial in Wall Street's biggest insider trading case in two decades. Asked why the latest case is in New Jersey, Fishman said many companies do business there. "This district is where Wall Street is wired," he said.

Evidence Destruction Alleged
Investigators said the defendants hatched their plan at an Atlantic City, NJ, 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.

The complaint 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.

"By the way, I got rid of my computer," Kluger was quoted as then saying. "I got rid of my iPhone where I had looked up some stock quotes. Those are gone. I mean history. Gone."

Wilson Sonsini spokeswoman Courtney Dorman said the firm is  cooperating with the federal investigation and was "shocked" to learn of the allegations against Kluger.

Skadden said it is also cooperating, and has strict policies to protect clients' confidential information. A Cravath spokeswoman had no immediate comment.