NEWSMAKER-Accused inside trader once sued for anti-gay bias

* Matthew Kluger was arrested for insider trading

* Kluger sued a former law firm where he worked - lawsuit

* Alleged discrimination because he is gay - court papers

By Dan Levine and Carlyn Kolker

SAN FRANCISCO/NEW YORK, April 7 (Reuters) - Matthew H. Kluger, the attorney accused of a long-running, $32 million insider trading scheme, bounced around at least five law firms -- and sued one of them claiming he was discriminated against because he is gay.

The 50-year-old Virginia man, arrested and charged on 17 counts including conspiring to trade on secrets stolen from Silicon Valley legal powerhouse Wilson Sonsini Goodrich Rosati, also had regularly leaked information he learned when he worked at two other prominent law firms, prosecutors said.

A court-appointed lawyer for Kluger declined comment on Thursday.

Kluger sued law firm Fried, Frank, Harris, Shriver & Jacobson after he left in 2002, saying he was discriminated against there after senior partners learned he was gay.

He contended he was instructed to find a new job after he took paternity leave to attend to his newborn twins, which were delivered through a surrogate mother.

He was repeatedly told that partners were "no longer comfortable" working with him after they discovered his sexual orientation, his New York State Supreme Court lawsuit said.

Both sides eventually agreed to discontinue the lawsuit, court records show. A Fried Frank representative declined to comment.

Kluger and a trader, Garrett D. Bauer, 43, were arrested on Wednesday and accused of reaping more than $32.2 million from trades on tips about upcoming mergers and acquisitions that Kluger learned as a lawyer at Wilson Sonsini.

Prosecutors outlined a 17-year-long pattern of leaks that began in Atlantic City, New Jersey, and ended last month as the defendants frantically tried to cover their tracks -- including talking with an unnamed co-conspirator about cleaning money in a washing machine or burning it.

Kluger also routinely leaked stock tips he learned when he worked at two other law firms, Cravath Swaine & Moore LLP and Skadden, Arps, Slate, Meagher & Flom LLP, prosecutors said.

Kluger and Bauer are both in federal custody. They have not yet entered pleas in the case. [ID:nN06204005]

Fried Frank was not named in the criminal complaint.

At a bail hearing for Bauer in Newark, New Jersey on Wednesday, a prosecutor said the government had learned of a fourth law firm's involvement. He did not name the firm.

$290,000 A YEAR

It is unclear what kind of work Kluger focused on while at Wilson Sonsini, a law firm with a long history handling some of the largest technology transactions. He left his $290,000-a-year job at the firm in March, according to prosecutors.

Kluger represented Nuance Communications Inc (NUAN.O), a voice recognition company, in correspondence with the regulatory agency over an accounting issue related to a pending acquisition by the company, according to a regulatory filing.

Kluger, after leaving Fried Frank, practiced law for a while in New Jersey. State corporation records show he briefly set up shop as a solo practitioner in South Orange, New Jersey, where he lived for several years.

He also worked for Sills Cummis & Gross, one of New Jersey's larger law firms. He worked there from about August 2002 until February 2004, said Mark Olinsky, a partner at the firm. He declined further comment.

According to his New York attorney registration, Kluger now works at TSX, a Fairfax, Virginia, entity involved in providing safety-related services.

The case also raises questions about how law firms protect themselves and clients against breaches in security.

Prosecutors say Kluger leaked information to Bauer about deals in which he was not personally involved. In an effort to avoid detection, Kluger searched his law firm's computer system to find the titles of documents and other information, but did not actually open files, according to court papers.

Like many other large law firms, Wilson Sonsini employees can search for documents across practice areas in the firm, one former Wilson Sonsini litigator said. The firm's attorneys can restrict access to documents, but that was usually done on an ad hoc basis, the lawyer said.

"If you're a litigation paralegal you could search for documents," the lawyer said. A Wilson Sonsini representative had no immediate comment.

Law firm ethics specialists stress that it is very difficult to stop someone intent on committing a crime. However, some data security steps can be taken, said Bill Wernz, a legal ethics attorney.

"You can use matter titles, like 'Project Sunrise,' rather than the acquisition of XYZ," Wernz said.

According to phone transcripts in the Kluger case, Wilson Sonsini would only switch to code names as a deal got close. (Additional reporting by Matthew Goldstein, Andrew Longstreth and Basil Katz in New York; Editing by Martha Graybow, Gary Hill)