(Bloomberg News) Trader Garrett Bauer had good reason to be nervous. Federal agents had just searched the home of his friend, a go-between in an alleged insider-trading scheme based on secret tips passed from a well-placed lawyer. The scam earned $32 million in profits for the three men, prosecutors said.

Bauer, 43, believed he had hidden their crimes by talking on disposable cell phones and using cash to reward the attorney and the middleman for the tips, prosecutors charged. What Bauer didn't know was the go-between had secretly recorded their conversations for the government, according to court papers.

"There is no way they could ever be recorded," Bauer said to the middleman about the telephone calls, according to a criminal complaint filed yesterday in federal court in Newark, New Jersey.

Bauer, arrested in New York, is accused of trading on tips from attorney Matthew Kluger, 50, who was picked up in Virginia. The case is the latest in a nationwide crackdown on insider trading that began with Galleon Group LLC co-founder Raj Rajaratnam, a billionaire hedge fund manager now on trial in New York. U.S. prosecutors rested their case against Rajaratnam yesterday, and a jury may begin deliberations by next week.

Like Bauer, Rajaratnam was secretly recorded by U.S. agents. Since 2009, probes of insider trading by U.S. Attorney Preet Bharara in Manhattan have led to about four dozen arrests and focused on hedge funds, corporate executives and so-called expert networking firms.

'Massive' Scheme

In announcing the case yesterday in Newark, U.S. Attorney Paul Fishman said Bauer and Kluger were charged for a "massive insider-trading scheme involving leading law firms, major corporate transactions, and millions of dollars in cash."

The scheme, he said, began with Kluger passing tips about deals he worked on as an associate at Cravath Swaine & Moore LLP from 1994 to 1997 and at Skadden Arps Slate Meagher & Flom LLP from 1998 to 2001.

After a five-year hiatus, the scheme resumed in December 2005 and continued until March 2011, when Kluger worked in the Washington office of Wilson Sonsini Goodrich & Rosati PC, authorities said. Kluger passed on tips about deals he culled from the law firm's computer system, according to a Federal Bureau of Investigation arrest complaint filed in court.

Government agents began working the case last year, Fishman said. The U.S. Securities and Exchange Commission's market surveillance helped uncover the pattern of insider trading, said Daniel M. Hawke, chief of the SEC's market abuse unit, at a news conference yesterday. The SEC filed a civil lawsuit against Bauer and Kluger.

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