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From Securities Regulation Daily, April 28, 2015

Former Foundry Networks exec gets 6.5 year prison term for insider trading

By Amanda Maine, J.D.

The U.S. Attorney for the Southern District of New York announced that former Foundry Networks, Inc. executive David Riley has been sentenced to 78 months in prison for passing inside information to a colleague who worked as an analyst at a hedge fund, who then traded on the information, yielding $39 million dollars in profits for his firm.

Scheme. Foundry is a technology company specializing in networking hardware. One July 21, 2008, Brocade and Foundry publically announced that Brocade would acquire Foundry for a combination of $18.50 cash as well as Brocade stock. David Riley was a vice president and Chief Information Officer (CIO) at Foundry. According to the indictment, Riley learned of the planned acquisition as early as July 1, 2008, and was present at meetings in which Foundry’s CEO discussed the acquisition. Riley also had responsibilities relating to due diligence in connection with the acquisition.

On several occasions, according to the government, Riley passed inside information about the planned acquisitions to Matthew Teeple, an analyst for hedge fund Artis Capital Management. Teeple in turn passed this information on to his colleagues and friends. Teeple and his tippees bought Foundry shares ahead of the prospective acquisition. Following the announcement of the acquisition, the price of Foundry’s stock increased 32 percent. Artis profited by $13.6 million from trading by Teeple and avoided losses of $7.4 million in would have incurred due to its prior short equity and options positions.

Prior to the announcement, Riley had also tipped Teeple about negative earnings news in April 2008, which resulted $2.6 million in profits for Foundry. In addition, Riley tipped Teeple about Foundry’s negative financial results in October 2008 before they were publicly announced. Teeple caused Artis to sell over one million shares of Foundry stock. After Foundry announced that its net operating income was $10 million less than it had been for the same quarter in the previous year and that the shareholder vote to approve the Brocade acquisition would be delayed, Foundry’s price per share fell from $17.04 to $12.67. Artis avoided $4.3 million in losses by selling Foundry stock. In total, the government alleged that Artis reaped gains of $39 million from the inside information Riley provided Teeple.

Trial, conviction, and sentence. Riley was charged with securities fraud and conspiracy to commit securities fraud and was convicted in September 2014 after a 13-day jury trial. On April 27, 2015, Judge Valerie E. Caproni sentenced Riley to 78 months in prison.  Teeple pleaded guilty to related charges in May 2014 and was sentenced to 60 months in prison. The SEC is also pursuing civil charges against Riley, Teeple, and one of Teeple’s tippees in a related proceeding.

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