Third Circuit Affirms Record 12 Year Prison Sentence For Inside Trader, Matthew Kluger
On December 14, 2011, Matthew Kluger pled guilty to criminal charges related to his involvement in a 17-year insider trading scheme. The District Court subsequently sentenced him to a total of 12 years in prison – thought to be the longest insider-trading sentence ever imposed. This sentence has now been upheld by the Third Circuit.
Kluger was a lawyer at some of the country’s most prominent law firms. While he was still in law school and working as a summer associate at one firm, he entered into a scheme with two other individuals – Garrett Bauer and Kenneth Robinson. Kluger gave inside information regarding mergers and acquisitions which he or his firm(s) were handling to Robinson who passed the information along to Bauer, a professional stock trader. Bauer would then make trades on behalf of all three individuals based upon the material he received from Kluger via Robinson. Robinson told Bauer how many shares to buy for himself and Kluger with the intent of keeping the number of purchases low enough so as to not draw attention. However, Bauer ignored these instructions and engaged in a level of trading far in excess of what Robinson had requested. The insider trading resulted in gross profits of over $47 million.
Kluger argued that the District Court erred in calculating his sentencing range because it attributed all of the money which had been earned as a result of the insider trading to him when his share of the profits was far less than the amount of money that Bauer made. According to Kluger, the District Court should have held an evidentiary hearing to determine whether he could have reasonably foreseen that Bauer would engage in the high level of trading that occurred. The Third Circuit disagreed and held that under the sentencing guidelines applicable to insider trading, all of Bauer’s gains were to be considered when calculating Kluger’s sentence because Bauer was acting in concert with Kluger and because Kluger provided inside information to Bauer.
Kluger also claimed that sentencing him based upon Bauer’s unforeseeable conduct accomplished no recognized penological goal. The Third Circuit rejected this argument, stating that punishing a conspirator who is the source of the information for all gains made by the co-conspirators would serve as a deterrent to potential sources of inside information. According to the Third Circuit, Kluger’s sentence would serve as a warning to individuals, like Kluger, who, in an attempt to limit their responsibility and the extent of their potential sentencing exposure, claim that they had agreements with their co-conspirators to limit the amount of money they would make from the inside trading.
Kluger also made an argument based on sentencing disparity since Bauer was sentenced to 9 years in prison and Robinson to just over 2 years. The Third Circuit determined that the differences in the sentences were justified by the fact that Kluger was the source of the information that permitted the scheme to function. Furthermore, Kluger was an attorney who had taken an oath to uphold the law. The Court noted that Kluger didn’t even wait to graduate from law school before using his employment at a law firm to initiate his illegal activity and that he was involved in this criminal conduct during most of his legal career – giving a whole new meaning to the term career criminal. Moreover, Kluger’s legitimate work as a lawyer provided him with an income well into the six figures – a salary which Kluger shouldn’t have felt compelled to augment through illegal activity. On the other hand, Bauer engaged in extensive community service work both before and after his arrest. Finally, Kluger’s sentence was within the guideline range and, therefore, reasonable.
