SEC Charges California-Based Hedge Fund Analyst and Two Others with Insider Trading
The Securities and Exchange Commission today charged a California-based hedge fund analyst with insider trading in advance of a merger of two technology companies based on nonpublic information he received from his friend who was an executive at one of the companies.
The SEC also charged the executive and another trader in the $29 million insider trading scheme.
The SEC alleges that Matthew Teeple of San Clemente, Calif., was tipped in advance of a July 2008 announcement that Foundry Networks Inc. had agreed to be acquired by Brocade Communication Systems Inc. for approximately $3 billion. Teeple’s source was Foundry’s chief information officer David Riley, a friend who he had previously given investment advice. Teeple then caused the San Francisco-based hedge fund advisory firm where he works to buy Foundry shares in large quantities in the days leading up to the public announcement, and the hedge funds managed by the firm reaped millions of dollars in profits when Foundry’s stock value increased upon the news. Teeple also tipped a Denver-based investment professional John Johnson who he befriended through a previous working relationship, and Johnson made illegal trades based on the nonpublic information. Riley also tipped Teeple in advance of at least two other major announcements by Foundry, and Teeple’s firm traded on the nonpublic information to make profits or avoid losses.
“David Riley was entrusted with Foundry’s most valuable secrets, but betrayed his company and set off an explosive chain reaction of illegal tips from friend to friend for illicit profits,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement.
Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Company insiders who reveal confidential information and the traders who trade on it can expect robust scrutiny from the SEC. The charges against Riley and Teeple are a cautionary tale for those considering insider trading that should make them think twice.”
In a separate action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Teeple, Riley, and Johnson.
According to the SEC’s complaint filed in federal court in Manhattan, Riley tipped Teeple on the morning of July 16 about Brocade’s impending acquisition of Foundry. Teeple immediately shared this information with colleagues at his firm as well as Johnson and several others who purchased Foundry stock, often within minutes of communicating with Teeple. Foundry stock climbed approximately 32 percent after the public announcement of the merger on July 21.
The SEC alleges that Riley, who lives in San Jose, Calif., continued to provide material nonpublic information to Teeple about key events throughout the process of Foundry’s acquisition by Brocade, which was not fully completed until Dec. 18, 2008. Teeple’s firm continued to profitably trade Foundry securities based on this inside information. For example, Riley tipped Teeple in advance of an October 24 announcement that Foundry’s shareholder vote to approve the acquisition would be delayed “given recent developments related to the transaction.” Earlier in 2008, Riley tipped Teeple in advance of Foundry’s April 11 earnings forecast so Teeple’s firm could profitably trade in advance of the announcement.
The SEC’s complaint charges Teeple, Riley, and Johnson with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws. The complaint also seeks to permanently prohibit Riley from serving as an officer or director of a public company.
The SEC’s investigation, which is continuing, has been conducted by Michael Holland, William Edwards, and Joseph Sansone of the Market Abuse Unit in New York as well as Christopher Ferrante and Melissa Coppola in the New York Regional Office. The case has been supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, and Financial Industry Regulatory Authority (FINRA).
Since October 2009, the SEC has charged more than 430 individuals and entities with insider trading. The defendants in these cases are alleged to have made approximately $940 million in illicit profits and losses avoided.