The U.S. Attorney’s Office in Manhattan and the SEC filed new insider trading cases. The new actions name as defendants two market professionals and a corporate insider who is the source of the information. SEC v. Teeple, Civil Action No. CV 2010 (S.D.N.Y. Filed March 26, 2013).
The defendants in the criminal and civil cases are Mathew Teeple, an analyst at a registered Investment Adviser; David Riley, the information officer at Foundry Networks, Inc., and John Johnson, currently the chief investment officer of a state pension system who was unemployed at the time of the events in this case. The actions center on three events: 1) the acquisition of Foundry by Brocade Communications Systems, Inc.; 2) and adverse announcement regarding the closing of that take-over made on July 21, 2008; and 3) the April 2008 Foundry earnings announcement.
On July 28, 2008 Brocade announced that it had signed a definitive merger agreement to purchase Foundry. The purchase price was $18.50 in cash and 0.0907 shares of Brocade stock for each Foundry share. The day after the announcement the share price for Foundry rose about 32%.
On July 16, Mr. Riley told Mr. Teeple about the proposed transaction. The two men had established a friendship years before when both worked for the same firm. Mr. Riley first learned about the deal over two weeks earlier when he began working on the internal preparations for it. Mr. Teeple in turn shared the information with the Investment Adviser where he was employed, Mr. Johnson and numerous friends. All purchased shares. The Investment Adviser had profits of about $13.6 million and avoided a loss of $7.4 million by liquidating what had been a net short position. A friend of Mr. Teeple, Friend A, had profits of $41,000 and Mr. Johnson made $136,000.
Subsequently, Brocade had difficulty securing the financing to close the transaction. In a conversation on October 16, 2008 Mr. Riley told Mr. Teeple about this problem who in turn informed the Investment Adviser. By the end of the day the Investment Adviser had sold its entire 1.1 million share stake in Foundry stock. Mr. Teeple also told Friend A who liquidated his shares and established essentially a short position.
On October 24, 2008 Brocade announced that the closing of the Foundry acquisition would be delayed. Foundry’s stock price plummeted. The Investment Adviser avoided trading losses of at least $4.3 million. Friend A had profits of about $11,000 from the short position and avoided losses of about $29,000.
Finally, the take over transaction was not the first tip Mr. Riley gave his friend. Prior to the April 2008 earnings announcement he told Mr. Teeple that the firm’s first quarter sales would not meet street expectations. The Investment Adviser, who was given the information, immediately reversed its trading strategy and began selling short. Prior to the opening of the markets on April 11, 2008 Foundry announced that its results for the quarter were below expectations. The stock price closed down significantly. The Investment Adviser had profits of about $2.6 million.
The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In the criminal case Messrs. Riley and Teeple have each been charged with one count of conspiracy to commit securities fraud and three counts of securities fraud. Mr. Johnson has been charged with one count of conspiracy to commit securities fraud and one count of securities fraud. Both cases are pending.