Tuesday, April 2, 2013

Hedge Fund Analyst Charged with Insider Trading

The SEC charged a California-based hedge fund analyst with insider trading in advance of a merger of two technology companies based on nonpublic information he received from his friend who was an executive at one of the companies.

The SEC also charged the executive and another trader in the $29 million insider trading scheme.

The SEC alleges that the hedge fund analyst of San Clemente, Calif., was tipped in advance of a July 2008 announcement that Foundry Networks Inc. had agreed to be acquired by Brocade Communication Systems Inc. for approximately $3 billion. The hedge fund analyst’s source was Foundry’s chief information officer, a friend who he had previously given investment advice. The hedge fund analyst then caused the San Francisco-based hedge fund advisory firm where he works to buy Foundry shares in large quantities in the days leading up to the public announcement, and the hedge funds managed by the firm reaped millions of dollars in profits when Foundry’s stock value increased upon the news. The hedge fund analyst also tipped a Denver-based investment professional who he befriended through a previous working relationship. The investment professional then made illegal trades based on the nonpublic information. Foundry’s chief information officer also tipped the hedge fund analyst in advance of at least two other major announcements by Foundry, and the hedge fund analyst’s firm traded on the nonpublic information to make profits or avoid losses.

“[The chief information officer] was entrusted with Foundry’s most valuable secrets, but betrayed his company and set off an explosive chain reaction of illegal tips from friend to friend for illicit profits,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Company insiders who reveal confidential information and the traders who trade on it can expect robust scrutiny from the SEC. The charges against [Foundry’s chief information officer] and [the hedge fund analyst] are a cautionary tale for those considering insider trading that should make them think twice.”