CIO Sentenced for Insider Trading

David Riley, formerly the Chief Information Officer of Foundry Networks, Inc. was sentenced to serve 60 months in prison and pay a $50,000 fine based on insider trading charges. He was found guilty by a jury following a 13 day trial. U.S. v. Riley, Case No. 1:13-cr-00339 (S.D.N.Y.)

The charges centered on two key events: 1) The acquisition of Foundry by Brocade Communications Systems, Inc. announced in July 2008; and 2) the April 2008 Foundry earnings announcement. As the CIO of Foundry Network Mr. Riley had access to sensitive company information. Mr. Riley furnished inside information regarding each event to Matthew Teeple, a former analyst for San Francisco based hedge fund Artis Capital Management, L.P. The two men had been friends for years, tracing back to a time when they were both employed by the same firm.

Mr. Riley learned about the proposed transaction between Foundry and Brocade in the weeks before the deal. In July 2008 he told Mr. Teeple about the then pending deal. Subsequently, Mr. Teeple informed his employer about the proposed transaction. The firm traded and eventually reaped significant profits.

As the CIO of Foundry Networks Mr. Riley also had access to the monthly and quarterly financial information about the firm. Prior to the April 2008 earnings announcement he told Mr. Teeple that the firm’s first quarter sales would not meet street expectations. Artis Capital immediately reversed its trading strategy after learning the information 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. Again the firm profited. Overall the firm had about $40 million in profits. Mr. Teeple previously pleaded guilty and was sentenced to serve 60 months in prison.

The SEC filed a parallel action alleging violations of Securities Act Section 17(a) and Exchange Act Section 10(b). SEC v. Teeple, Civil Action No. CV 2010 (S.D.N.Y. Filed March 26, 2013). The action is pending and is discussed here .

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