The Securities and Exchange Commission has charged a California-based hedge fund analyst with insider trading in advance of a merger of two technology companies based on non-public 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 USD29m insider trading scheme.
The SEC alleges that Matthew Teeple of San Clemente, California, was tipped in advance of a July 2008 announcement that Foundry Networks had agreed to be acquired by Brocade Communication Systems for approximately USD3bn. 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 non-public 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,” says George S Canellos, acting director of the SEC’s division of enforcement.
In a separate action, the US 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 16 July 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 per cent after the public announcement of the merger on 21 July.
The SEC alleges that Riley, who lives in San Jose, Calif., continued to provide material non-public information to Teeple about key events throughout the process of Foundry’s acquisition by Brocade, which was not fully completed until 18 December, 2008. Teeple’s firm continued to profitably trade Foundry securities based on this inside information. For example, Riley tipped Teeple in advance of a 24 October 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 11 April 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.
