SEC Settles Another Insider Trading Case Tied To Brocade Deal
The acquisition of Foundry Networks, Inc., a networking hardware company, by Brocade Communications System, Inc., a technology company specializing in data and storage networking products, announced on July 21, 2008, has spawned two enforcement actions by the Commission and two criminal case. The first SEC action, discussed here, named as defendants David Riley, Matthew Teeple and John Johnson, respectively Foundry’s chief information officer, an analyst at Artis Capital and an adviser at Artis. SEC v. Teeple, Civil Action No. 13-cv-2010 (S.D.N.Y.). The Commission settled that action with each defendant consenting to the entry of a permanent antifraud injunction. In addition, Mr. Riley agreed to pay disgorgement, prejudgment interest and a penalty totaling $9,082. Mr. Teeple paid a total of $166,532 and Mr. Johnson, who cooperated with authorities, paid disgorgement of $137,238 along with prejudgment interest and has been barred from the securities business.
In a parallel criminal case Mr. Riley was found guilty following a jury trial on one count of conspiracy to commit securities fraud and two counts of securities fraud. He was sentenced to 78 months in prison and ordered to pay a fine of $50,000. U.S. v. Riley, No. 13-cr-339 (S.D.N.Y.). Mr. Teeple pleaded guilty to one count of securities fraud, was sentenced to 60 months in prison and was ordered to pay a fine of $100,000. U.S. v. Teeple, No. 13-cr-339 (S.D.N.Y.).
The second SEC action names Andrew Miller as a defendant. SEC v. Miller, Civil Action No. 15-cv-4585 (S.D.N.Y. Filed June 12, 20145) Like the first, it centers on the Brocade-Foundry transaction. Following the deal announcement, made after the close of trading on July 21, 2008, the share price increased 32% on news that the deal was priced at $18.50 per share in cash plus 0.0907 shares of Brocade stock. As the firm’s chief information officer, Mr. Riley had learned about the deal three weeks earlier on July 1, 2008. Sixteen days later he told his friend and former colleague, Matthew Teeple about the deal. He in turn caused Artis Capital to purchase shares.
The same day – July 21 – Mr. Teeple called his friend Andrew Miller and told him he should purchase Foundry stock. One hour later Mr. Miller bought 850 shares in his mother’s account.
Although the Brocade – Foundry deal was announced on July 21, it was not completed until December 18, 2008. During the post announcement – pre-closing period there was conflicting information regarding whether the deal would in fact close. For example, a shareholder vote was scheduled for October 24, 2008. Brocade had announced an arrangement for a $1.225 billion secured credit facility to finance part of the deal. Brocade had not disclosed that it was experiencing difficulty securing an additional $400 million in financing for the deal.
Messrs. Riley and Teeple kept in touch, discussing key events. During the morning of October 16, 2008 the two men spoke. Foundry’s share price was $16.50. That evening Mr. Teeple spoke with Mr. Miller. Over the next two days Mr. Miller sold all of his shares and purchased 55 put options with a strike price of $15 per share and an expiration date of November 2008. The next week Foundry announced that the shareholder vote would be delayed until the end of October because of events related to the deal. The firm’s share price, which had been $17.04 at closing on October 23, dropped to a low of $9.25 before closing at $12.67. Mr. Miller reaped profits and avoided losses of over $40,000. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).
Mr. Miller cooperated with the SEC and the U.S. Attorney’s Office. He resolved the Commission’s charges by agreeing to the entry of a permanent antifraud injunction. He will pay disgorgement of $40,136 along with prejudgment interest and a civil penalty of $20,068. See Lit. Rel. No. 23284 (June 12 2015).