Federal authorities on Wednesday arrested a New York stockbroker and an attorney in Washington, D.C., for their alleged involvement in an insider-trading scheme that officials say continued for 17 years.

The attorney, who worked in the mergers and acquisitions department of Wilson Sonsini Goodrich & Rosati, used his position as a senior associate to obtain sensitive, confidential information about pending deals. The lawyer then passed the information to another person who forwarded it to the stockbroker in New York.

This is the latest of several recent cases investigated under the auspices of the Obama administration’s Financial Fraud Enforcement Task Force.

How it worked

The broker purchased shares in the involved company, in anticipation of the company’s stock rising once the pending deal became public knowledge. Once the stock price jumped, the broker would quickly sell the stock and divide the profits among the three alleged co-conspirators. The proceeds were paid in cash through multiple ATM withdrawals from the trader’s account.

During the past five years, the trader invested $109 million in the scheme and made more than $32 million in illicit profits, according to Paul Fishman, US Attorney for New Jersey.

The middleman in the alleged scheme is identified only as CC-1, or co-conspirator No. 1. It appears from court documents that CC-1 is cooperating with investigators.

The trader, Garrett Bauer of New York City, and the lawyer, Matthew Kluger of Oakton, Va., were both arrested by FBI and IRS agents at their homes early Wednesday.

They both face 15 charges, including conspiracy to commit securities fraud, securities fraud, money laundering conspiracy, and obstruction of justice.

They face up to five years in prison and a $250,000 fine on the securities fraud charge, and 20 years in prison and a $500,000 fine for each of the other charges.

The alleged crimes

“The impact of crimes commonly referred to as ‘insider trading’ is unmistakable,” said FBI Special Agent in Charge Michael Ward. “Millions of investors have entrusted their life savings to the integrity of the financial markets and the belief of a level playing field. Insider trading corrupts the process and tilts the playing field in favor of those privileged few with access to information not available to the public.”

According to court documents, the two men engaged in 11 insider trades since April 2006. They tried to conceal their operation by talking only on public pay phones or prepaid cell phones.

Their profits ranged from $119,00 in a deal with 3Com Corp. to seven deals that made over a million dollars each. They illegally invested in McAfee Inc., Palm Inc., Advanced Digital Information Corp., and other tech stocks.

Their biggest haul of the past 17 years, according to court documents, came from a series of insider trades involving Sun Microsystems, carried out in April 2009. On April 20, Oracle announced it would purchase Sun Microsystems. The broker sold stock acquired in the previous three days, yielding an illicit profit of $11.4 million.

Federal authorities say they will be seeking forfeiture of all illegally acquired profits – more than $32 million. To that end, the government plans to seize homes allegedly purchased by Mr. Bauer with proceeds from the insider deals, including a $6.65 million condo on New York’s Upper East Side and an $875,000 home in Boca Raton, Fla.

The beginning of the end

In recent months, Bauer and Mr. Kluger became alarmed that authorities might discover their scheme. At one point, officials say, Bauer destroyed a prepaid cell phone and discarded its pieces in two different garbage cans at a McDonald’s restaurant.

Bauer reportedly instructed CC-1 to burn $175,000 in cash because he was worried that he’d left his fingerprints on the crisp bills.

The federal complaint also quotes Kluger telling CC-1 that he doubted federal investigators had evidence of the illicit trades: “I think there’s a pretty good chance that we get past it. I don’t think they are going to conclude that they have enough to go to court with.”

Kluger reportedly destroyed the computer and iPhone he used to look up stock quotes. He allegedly said, “If they start looking at me and look at my bank records and all that other stuff it could be, it could get ugly.”

The next day, March 18, Bauer expressed his own concerns about federal investigators, according to court documents. “I can’t sleep. I can’t sleep,” he’s quoted as saying. “I’m waiting for the FBI to ride into my apartment. And I’m on edge all night thinking that they’re coming in.”

He was right to be worried. The FBI arrived at his apartment Wednesday morning.