Insider Trading: Long a Commission Staple
Insider trading has long been a key focus of SEC Enforcement. While some cases are complex others are relatively straight-forward. For example, a recent international insider trading action involved over 3,000 securities with traders in multiple countries. The analysis of the transactions required a high degree of sophisticated data analysis.
Others are more straight forward but nevertheless, difficult to detect and prove. The Commission’s most recent case in this area is an example. There a group of friends clustered around a corporate insider traded on inside information in the firm’s securities for years before being detected, apparently by happenstance. Nevertheless, they were uncovered and named as defendants in a Commission enforcement action. SEC v. Nellore, Civil Action No. 5:19-cv-08207 (N.D. Cal. Filed Dec. 17, 2019).
Defendant Janardhan Nellore, the IT administrator of Palo Alto Networks, Inc., a cloud computing firm based in Santa Clara, was at the center of the insider trading ring. Involved as tippees, and also named as defendants, were four friends, three from working at the firm — defendant Sivannorayana Barama, a software engineer, Saver Hussain, an IT consultant who was not just a friend but had financial ties with Mr. Nellore, and Prasad Malempati. Defendant Ganapathi Kunadharaju, another Santa Clara software engineer was a friend of Mr. Nellore from college in India.
From about 2015, when Mr. Nellore received a promotion at his firm that gave him greater access to information, until about 2019 when he was arrested for identity theft when trading through the account of another, Mr. Nellore and his friends repeatedly traded on inside information he obtained through his position at work. At their peak the men had about $7 million in trading profits.
After being at Palo Alto Networks for about three years Mr. Nellore received a promotion after which the ring began trading. In 2015, for example, Mr. Kunadharaju granted his friend electronic assess to his securities trading accounts. Mr. Nellore explained that he would use the access to conceal his trading. He also agreed to furnish the inside information to his friend. The trading profits were divided such that each man kept the profits generated by the money he put in the accounts. In addition, Mr. Kunadharaju periodically withdrew sums under $10,000 from the accounts to give to his friend. Mr. Nellore entered into a similar arrangement with Mr. Hussain.
In contrast, Mr. Nellore regularly tipped Mr. Malempati in return from market information developed by his friend to inform and aid his trading. Mr. Barama, on the other hand, was gifted the inside information, according to the complaint.
The trading patterns over the years appeared to have been largely the same. Mr. Nellore would communicate the information to each of this friends who traded. Frequently, prior to a trade there would be a number of communications about the transaction. While at first the men would refer to the firm’s shares by company name, later they referred to the stock as “baby.” At Mr. Nellore’s directions, the men also traded options to maximize the profits.
An example of the trading involved the transactions executed prior to the company earnings announcement on November 21, 2016. In this instance Mr. Nellore obtained confidential information regarding the firm’s earnings and performance for the first quarter of 2016 three days prior to the announcement. The next morning Defendants Nellore, Barama and Kunadharaju began trading options. At 6:41 a.m. Mr. Barama placed an order for 72,000 put options. Two minutes later Mr. Nellore paid about $14,000 to acquire options in the account of Mr. Kunadharaju. Mr. Nellore then talked on the phone with Mr. Barama and the Mr. Kunadharaju just after 11:00 a.m.
Subsequently, the company announced disappointing earnings on November 21, 2016 at about 1:00 p.m. The share price declined about 13%. Defendants Nellore, Barama and Kunadharaju sold the options over the next two days reaping profits of over $200,000. The complaint alleges violations of Exchange Act Section 10(b) and for aiding and abetting. The case is pending. The U.S. Attorney’s Office for the Northern District of California announced parallel criminal charges against Messrs. Nellore and Barama.