U.S. Department of Justice

United States Attorney
Southern District of New York

Tuesday, March 26, 2013

Former Chief Information Officer of Technology Company and Hedge Fund Analyst Charged in New York with Insider Trading

Hedge Fund Allegedly Earned More Than $27 Million in Profits and Avoided Losses in Scheme; Guilty Plea of Third Defendant in Scheme Also Announced

David Riley, a former chief information officer and vice-president for Foundry Networks Inc. and Matthew Teeple, an analyst for an investment advisory firm to a family of hedge funds located in San Francisco (Investment Adviser A) were charged today for their alleged involvement in an insider trading scheme, announced Preet Bharara, the U.S. Attorney for the Southern District of New York and George Venizelos, the Assistant Director-in-Charge of the New York Field Office of the FBI. Riley allegedly provided material, nonpublic information concerning Foundry, a publicly traded technology company, to Teeple.  Teeple then caused others to execute trades based upon the inside information, including in accounts managed by investment adviser A.  In total, these trades earned investment adviser A profits of over $16 million and enabled investment adviser A to avoid losses in excess of $11 million. Teeple was arrested this morning in San Clemente, Calif. and is expected to be presented later today in federal district court in the Central District of California. Riley was arrested this morning in San Jose, Calif., and is expected to be presented later today in federal district court in the Northern District of California.

 U.S. Attorney Bharara and the FBI also announced the unsealing of the guilty plea of John Johnson to conspiracy and securities fraud charges in connection with this insider trading scheme. Johnson pleaded guilty to these charges on March 18, 2013, before U.S. District Judge John F. Keenan.

U.S. Attorney Preet Bharara said: “As alleged, when David Riley and Matthew Teeple chose to traffic in inside information involving high-tech companies, they embarked on a high-stakes game that has repeatedly proven to be unwinnable.  With the charges against them and the plea of John Johnson that we announce today, the ranks of privileged professionals who behave as if they are above the law continue to swell.”
 
  FBI Assistant Director-in-Charge George Venizelos said: “There may be little to distinguish this case from the dozens of others we have made against industry insiders and investment advisers in the past several years. There is certainly nothing unique about the outcome: If you allegedly traffic in inside information, by providing it or trading on it, you will inevitably be found out, charged and prosecuted.”

 In a separate action, the U.S. Securities and Exchange Commission (SEC) announced civil charges against Riley, Teeple and Johnson.

According to the complaint and other court documents:

Throughout the insider trading scheme, Riley obtained inside information from Foundry and shared it with Teeple.  As chief information officer and a vice president at Foundry, Riley had access to monthly and quarterly financial reporting, along with other sensitive, non-public information relating to Foundry, well before such information became public.  After receiving inside information concerning Foundry from Riley, Teeple then shared this information with others, including another analyst who works at Investment Adviser A (the Investment Adviser A Analyst) and others who then traded in Foundry securities. Investment adviser A was an investment adviser for a family of hedge funds.

For example, on July 16, 2008, Riley provided Teeple with inside information concerning Foundry’s acquisition by another technology company, Brocade Communications Systems Inc. before it was publicly announced on July 21, 2008.  Within two hours of this conversation between Riley and Teeple, Teeple made a phone call to the investment adviser A Analyst.  While Teeple and the investment adviser A analyst were on the phone, investment adviser A began purchasing a large amount of Foundry stock and call option contracts and selling put option contracts for Foundry.  From approximately July 16, 2008, until the July 21, 2008 public announcement of Brocade’s acquisition of Foundry, investment adviser A purchased approximately 3,245,380 shares of Foundry.  Based upon its trading in connection with the inside information concerning Foundry’s acquisition by Brocade, investment adviser A profited in the amount of approximately $13.6 million and avoided losses of approximately $7.4 million that it would have incurred due to its prior positions in Foundry.

Teeple also provided the Inside Information concerning Brocade’s impending acquisition of Foundry to two acquaintances of his, John Johnson and Karl Motey, before the July 21, 2008 public announcement.  Teeple told Johnson and Motey that Foundry was going to be acquired by Brocade and the approximate price at which Foundry was going to be acquired, which turned out to be substantially accurate when the terms of the acquisition were made public.  Johnson traded on this inside information and profited in excess of $136,000.

In addition, on multiple occasions, Riley provided inside information concerning Foundry’s quarterly financial reporting to Teeple in advance of any public announcement.  Teeple contacted the investment adviser A analyst shortly after these conversations with Riley in April 2008 and October 2008.  Investment adviser A subsequently traded in large quantities of Foundry equities based upon this Inside Information, amassing millions of dollars in both profits and avoided losses.
 
 Riley, 47, of San Jose is charged with one count of conspiracy to commit securities fraud and three substantive securities fraud counts.  The conspiracy count carries a maximum sentence of five years in prison and a fine of the greater of $250,000 or twice the gross gain or loss from the offense.  Each of the securities fraud counts carries a maximum sentence of 20 years in prison and a fine of $5 million or twice the gross gain or loss from the offense.

 Teeple, 41, of San Clemente is charged with one count of conspiracy to commit securities fraud and three substantive securities fraud counts.  The conspiracy count carries a maximum sentence of five years in prison and a fine of the greater of $250,000 or twice the gross gain or loss from the offense.  Each of the securities fraud counts carries a maximum sentence of 20 years in prison and a fine of $5 million or twice the gross gain or loss from the offense.

 Johnson, 46, of Arvada, Colo., is charged with one count of conspiracy to commit securities fraud and one substantive securities fraud count.  The conspiracy count carries a maximum sentence of five years in prison and a fine of the greater of $250,000 or twice the gross gain or loss from the offense.  The securities fraud count carries a maximum sentence of 20 years in prison and a fine of $5 million or twice the gross gain or loss from the offense.

 U.S. Attorney Bharara praised the investigative work of the FBI.  He also thanked the SEC. He noted that the investigation is continuing.

  This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a co-chair of the Securities and Commodities Fraud Working Group.  The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations.  Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants.  For more information on the task force, please visit www.StopFraud.gov.
 
The case is being handled by the Office’s Securities and Commodities Fraud Task Force.  Assistant U.S. Attorney Steve Lee is in charge of the prosecution.

The charges contained in the complaint against Teeple and Riley are merely accusations and the defendants are presumed innocent unless and until proven guilty.

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