by T. GormanPosted on Posted in SECActions

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.

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by T. GormanPosted on Posted in SECActions

There has been a great deal of controversy about the SEC’s policy of permitting defendants to settle enforcement actions without admitting or denying the facts alleged in the complaint. While the policy traces its origins to the early days of the Enforcement Division, and is used by many Federal agencies, some critics claim it should be abandoned and that settling defendants should be required to make admissions. The Commission has staunchly defended its policy. Thus those settling with the agency typically are not required to make admissions. There may be some instances, however, in which a defendant may not be able to rely on the policy. That may well have been the case for Juan Carlos Bertini, accused of insider trading by the Commission. SEC v. Bertini, Case No. C 13 1292 (N.D. Cal. Filed March 22, 2013).

The case centers around the acquisition of Del Monte Foods Company by an investor group composed of Centerview Partners, Kohlberg Kravis Roberts & Co. and Vestar Capital Partners. The deal was announced on November 25, 2010 at $19 per share, a premium to market.

Mr. Bertini was employed at Del Monte as a vice president of finance. In that position he regularly had confidential, sensitive information of the company. He was subject to the firm’s insider trading policy.

By no later that November 11, 2010 Mr. Bertini was invited to join a select group of Del Monte employees working on the deal. Specifically, the group was charged with acquiring information for the investor group and the Del Monte Board of Directors. Mr. Bertini reported directly to the CEO and CFO. Through his position Mr. Bertini came into possession of material, non-public information about the proposed transaction. To help preserve the confidentiality of the deal, it was code named “Project Cambridge.”

Within days of becoming a member of the working group Mr. Bertini began purchasing shares of his company. Between November 18, 2010 and November 23, 2010 he spend $135,000 to acquire 8,000 shares of Del Monte stock. Although he had a brokerage account, the purchases were made through his mother’s account.

Subsequently, FINRA contacted Del Monte about certain trading that took place in advance of the take-over announcement. As part of the inquiry Del Monte’s counsel questioned Mr. Bertini. Rather than admit his error, Mr. Bertini claimed that the trades had actually been placed by his mother. The purchases were based on articles his mother read, Mr. Bertini told investigators. When he learned of the trades he insisted they were unacceptable and directed her to sell the shares.

Mr. Bertini settled insider trading charges with the Commission. He consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b) and agreed to pay disgorgement of $16,035, prejudgment interest and a civil penalty of $32,070. He also agreed to the entry of a five year officer and director bar. In entering into the settlement Mr. Bertini did not admit or deny the facts alleged in the complaint to the Commission. Chances are, however, that Mr. Bertini was not able to take that position with his mother. See also Lit. Rel. No. 22659 (March 22, 2013).

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