“Ethics Week 2012” at Baruch College generated a series of programs featuring guest speakers and faculty members. Tuesday, March 27, I attended “The Story of an Exposed Insider Trader” sponsored by the Robert Zicklin Center for Corporate Integrity (ZCCI).
Donald H. Schepers, Academic Director of ZCCI, moderated a panel discussion for a large and very interested audience. Panelist included: Garrett Bauer, a former day trader who pleaded guilty to insider trading, obstruction of justice, and money laundering in December 2011; Walter Pavlo Jr. who oversaw a $2 billion operation at MCI Communications and embezzled $6 million; and Michael F. Bachner of Michael F. Bachner & Associates, P.C. who specializes in white collar criminal defense and securities litigation.
According to the U.S. Security and Exchange Commission, insider trading has two meanings: legal and illegal conduct. As stated on the SEC website, “The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC.” And “Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include ‘tipping’ such information, securities trading by the person ‘tipped,’ and securities trading by those who misappropriate such information.”
After introductions by Prof. Schepers, Mr. Bauer, who is now awaiting sentencing for his actions, came to the podium and quietly but effectively shared his story of crimes that spanned 17 years and brought in $37 million. Without notes and in a manner perfected by presenting to other college audiences and non-profits, he explained to the audience what constitutes insider trading, how he became involved, and the scheme itself.
Bauer was a day or short-term trader whose business wasn’t that profitable. He met Matthew Kluger, a contract lawyer whose work at high-profile deal-making law firms gave him access to financial opportunities. Tips from Kluger were passed to Kenneth Robinson, a friend of Bauer’s with whom he spoke with very often, sometimes every day.
When asked by an audience member, “What was your drive to trade illegally?” Bauer responded that he had just moved to New York City and his trading was not going well. He had to get cash advances on his credit cards to survive. Information from Ken was vague; Bauer’s trades made him millions of dollars over a few days then lost the same amount later. “I didn’t think of the consequences,” stated Bauer who is now “happy not dealing with trading.”
One day, Bauer decided not to trade but Ken traded $700,000 and was caught. One day after that, twenty FBI agents entered Bauer’s apartment in the early morning and proceeded to take the trader to a state jail in New Jersey, what Bauer would find as “the scariest place on earth”. Negotiations led to Bauer’s brother paying his bail and his mother leaving her home in Florida to be with Bauer while he was confined to his apartment.
Bauer knew that it was Ken who had turned him in and also knew that Ken, because he had cooperated with the SEC, would not have a long if any sentence or even a large fine. Bauer, who was a regular and loyal volunteer at non-profits, is scheduled to be sentenced by May 1 to a Federal Prison for 9 or more years. Once the former trader gets out of prison and starts to work, the government can garnish his earnings until the $11 million they require is paid. Calm and accepting of his penalty, Bauer has one shining light: “My relationships with my family and friends are stronger than ever.”
Walt Pavlo Jr.
“Where were you on 9/11?” is one question Walt Pavlo doesn’t want to answer because from 2001-2003, he was serving time in a Federal Prison for insider trading. While working at MCI Communications, he oversaw a $2 billion operation and also ways to improvise and embezzle $6 million. “I’m invincible,” he felt and continued his ‘personal’ activity at the company. While at home, he said, “I don’t want to talk about it.” However, when the time came that he had to go prison, he told his two sons (10 and 9) that he got a government job and not the truth. He and his wife talked about divorce but she vowed not to leave him.
“No one told him to cook the books” but he did it under the guise of helping the company while auditors turned a blind eye to what he was doing. It was a junior auditor who found out his embezzlement. And Pavlo learned the hard way that was “where fraud is uncovered.”
“People pay a price on what was done,” and Pavlo went public in 2007 to share his story. Stolen Without A Gun by Pavlo and Neil Weinberg (Etika, 2007), is a confessional on how his crimes contributed to the collapse of Bernie Ebbers’ Worldcom. Today, in addition to being a speaker, Pavlo is a blogger for Forbes Magazine on White-Collar Crime.
On his blog recently, Pavlo wrote a post on Before Prison – Future Inmates Get in Their Vacation and referenced Bauer’s situation. “…life waiting to be sentenced to prison is not much better than being in prison. I recently spoke with Garrett Bauer, who has pled guilty to insider trading and is scheduled to be sentenced May 1st and may receive up to 11 years in prison. Bauer told me, ‘This time just seems a bit surreal right now. In some ways, it is like I am already in prison since I don’t work nor can I make any plans.’ Currently, Bauer spends his days giving lectures on his case to universities and volunteers for non-profit groups. ‘I’ve volunteered for years but now it is the focus of why I get up every day. I travel some, but really only to do a few speeches,’ he said.” Palvo summed up the life of future inmates that “they remain searching for that last memory to take with them to prison.
Michael F. Bachner
“Where are the insider traders?” Bachner stated then tongue in cheek told the audience to “look right and left.” To the question of “Why is this happening so frequently?” the lawyer’s answer was “The luck of getting caught.” “How busy is the prosecutor?” is determined by how many cases can be handled meaning that some cases are put on hold for years.
Bachner said that because of the now highly computerized SEC, there is a massive focus on catching insider traders. “Money isn’t power,” he tells his audience and suggests that it is “Better to be a little poorer and a little happier” than be an insider trader. Especially since that in 1987, sentences for insider trading was 3 years and today cases like Bauer’s is 9-11 years or more.
Prof. Schepers wound up the question and answer period by asking the panelists to offer a ‘takeaway’ for the members of the audience. His advice to those in attention was to have the feeling that “you could walk outdoors and be okay” and that “you can walk away from any situation.”
Bauer spoke with earnest that you should, “Think harder before you act on something. A small crime can build on itself.”
Pavlo offered his personal experience that others shouldn’t follow: “I knew what was wrong and didn’t stop. I went along with it.”
Bachner feels that, “Society is a big loser because they are missing Bauer’s volunteer work.” In keeping with the tone of his legal presentation at the end of the program, his last words of wisdom were, “Don’t do stupid things!”
Later that day during the “Organizational Behavior” class I teach at Zicklin, I asked my students, “What week is this?” “The last week in March” wasn’t the answer. Another student said it was, “Ethics Week” to which another student stated that, “Every day is an ethics day.” And he was right. Ethical behavior is an integral part of one’s life each day.