(Adds court hearing, details of charges, comments from lawyers and Simpson Thacher)
By Jonathan Stempel
March 19 (Reuters) - A Morgan Stanley stockbroker and a clerk at a prestigious New York law firm were charged with insider trading in corporate mergers, in an alleged four-year scheme involving a middleman who would chew up napkins on which he passed illegal tips.
Authorities said Steven Metro, 40, a managing clerk at Simpson Thacher & Bartlett, stole tips about corporate transactions involving his firm's clients, and passed them through the middleman to stockbroker Vladimir Eydelman, 42, who would trade for himself, family, the middleman and customers.
They alleged that the scheme netted more than $5.6 million of illegal profit on at least 12 transactions, with some profits being kicked back to Metro, and other profits spent by Eydelman on a home, jewelry and a $118,000 Maserati.
The case is the latest in a multi-year federal crackdown on insider trading. It was uncovered after the middleman, a friend of Metro's who met him in 1995 in their first year of law school, began cooperating with the FBI in December.
U.S. Attorney Paul Fishman in New Jersey said transactions covered by the criminal complaint included a 2009 investment in Sirius XM Radio by Liberty Media Corp, and a 2013 merger of Office Depot Inc and OfficeMax Inc.
The U.S. Securities and Exchange Commission filed a related civil lawsuit against Eydelman and Metro. Authorities said more than $33 million of illegal trades were made.
"Law firms are sanctuaries for the confidential treatment of client information," Daniel Hawke, chief of the SEC enforcement division's market abuse unit, said in a statement. "This scheme victimized not only a law firm but also its corporate clients and ultimately the investors in those companies."
The case echoes a 2011 prosecution, also in New Jersey, where a corporate lawyer was accused of passing merger tips to a trader, netting more than $37 million over 17 years, with the help of a middleman who eventually cooperated with authorities.
Eydelman, 42, of Colts Neck, New Jersey, was charged with eight counts of securities fraud, and Metro, 40, of Katonah, New York, was charged with nine counts. Each was also charged with four counts of tender offer fraud and one count of conspiracy.
Bail was set at $1 million for each defendant at a hearing before U.S. Magistrate Judge Madeline Cox Arleo in the federal court in Newark, New Jersey, according to Fishman's office.
William Silverman, a lawyer for Eydelman, declined to comment. James Froccaro, a lawyer for Metro, said his client "looks forward to being vindicated."
Morgan Stanley put Eydelman on leave and will cooperate with authorities, spokesman James Wiggins said. "Obviously we do not tolerate insider trading," he added.
Simpson Thacher said it terminated Metro's employment on Wednesday, and will also cooperate with authorities.
The 130-year-old law firm called the charges "deeply disturbing and unprecedented in our long history," and "completely inconsistent with our values, our culture and the strict policies we have in place to protect client confidences."
Simpson Thacher said it has more than 850 lawyers. Metro earned his law degree but worked as a clerk, prosecutors said.
HUNGRY FOR TIPS
Prosecutors said the middleman, identified in court papers as a confidential witness or "CW," would get tips from Metro at a Manhattan bar or coffee shop near where they worked, and then meet Eydelman near the central clock in Grand Central Station.
They said the middleman would show Eydelman a napkin or piece of paper, such as a post-it note, containing the ticker symbol of the stock that was to be purchased.
Once Eydelman memorized the tip, "the CW then would fold up the paper or napkin with the ticker symbol(s) written on it, place it into his mouth, and chew the paper or napkin to destroy it," the criminal complaint said.
Eydelman allegedly began his illegal trading at Oppenheimer & Co, where he had worked before joining Morgan Stanley in Sept. 2012. An Oppenheimer spokeswoman had no immediate comment.
Authorities said the middleman this year began recording conversations with the defendants, including on Feb. 20 when Eydelman gave him a cigar box containing $7,000 meant for Metro, who wanted money to buy and renovate a new home.
"Take these cigars, put it to good use," Eydelman told the middleman, according to the criminal complaint.
In the 2011 case, the lawyer Matthew Kluger was charged with passing tips to the trader Garrett Bauer, with the help of middleman Kenneth Robinson. Kluger was sentenced to 12 years in prison, Bauer to nine years, and Robinson to 2-1/4 years.
The cases are U.S. v. Metro et al, U.S. District Court, District of New Jersey, No. 14-cr-08079; and SEC v. Eydelman et al in the same court, No. 14-01742. (Reporting by Jonathan Stempel in New York; Editing by Stephen Powell, Bernard Orr)