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U.S. Charges Two in $27 Million Insider-Trading Scheme

A former Foundry Networks Inc. executive was charged in what prosecutors called a $27 million insider-trading scheme with tipping a California hedge fund analyst about the company’s acquisition by Brocade Communications Systems Inc.

David Riley, 47, the former chief information officer for Foundry Networks, and Matthew Teeple, 41, an analyst for an unidentified San Francisco-based hedge fund, were charged yesterday in a felony complaint filed in federal court in Manhattan, prosecutors said. The U.S. Securities and Exchange Commission also sued the two, as well as third man, John V. Johnson.

Riley and Teeple are charged with conspiracy and securities fraud. The most serious charge of securities fraud carries a sentence of as long as 20 years in prison, Manhattan U.S. Attorney Preet Bharara’s office said. Johnson, 46, of Arvada Colorado, who the U.S. said was a portfolio manager for a Denver-based firm, pleaded guilty to insider-trading charges on March 18 before U.S. District Judge John Keenan in New York.

“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,” Bharara said in a statement.

Brocade Deal

On July 16, 2008, Riley provided secret tips about Foundry being acquired by Brocade to Teeple before the deal was announced on July 21, 2008, prosecutors said. Within two hours of his conversation with Riley, Teeple called an analyst at the unidentified investment adviser, causing the fund to execute trades based on the inside information, according to the U.S.

In total, trading on the tips, one investment adviser earned more than $16 million and avoided losses of more than $11 million, Bharara’s office said.

The U.S. said Teeple also provided tips about Foundry’s 2008 acquisition by Brocade to two acquaintances, Johnson and Karl Motey, a California-based investment adviser. Johnson traded the information and made more than $136,000 in profit, prosecutors said.

The investment adviser, which wasn’t named by the U.S., is a registered investment adviser based in San Francisco that serves multiple hedge funds that have about $1.7 billion of assets under management, the SEC said.

Pension System

The SEC identifies Johnson as currently serving as the chief investment officer of a state pension system. At the time the SEC alleges the insider trading occurred, Johnson was unemployed and traded securities in his and his family members’ personal brokerage accounts.

Motey, a former technology stock analyst, pleaded guilty and has been cooperating with the U.S. in its insider-trading investigations. He testified for the government in two insider-trading trials and secretly recorded more than 400 conversations for the Federal Bureau of Investigation in New York.

Motey testified against Doug Whitman, the founder of Whitman Capital LLC, and James Fleishman, a former executive for Primary Global Research LLC. Both Whitman and Fleishman were convicted after federal trials in New York. Motey was sentenced in February to time served.

Teeple was arrested by FBI agents yesterday morning in San Clemente, California. He appeared before a federal magistrate in Santa Ana, California, and was released on two $100,000 bonds secured by his wife and his father. Teeple was ordered to appear in federal court in New York by April 8.

Teeple’s Lawyer

“Mr. Teeple intends to vigorously defend himself against the government’s allegations,” Nathan Hochman, a lawyer for Teeple, said in a phone interview.

John Kaley, a lawyer for Riley, didn’t immediately return a voice-mail message seeking comment on the criminal charges or the SEC lawsuit. Joshua Franklin, a lawyer for Johnson, declined to comment on his client’s guilty plea.

Riley was arrested by the FBI yesterday morning in San Jose, California, and was scheduled to appear in federal court in the Northern District of California yesterday, prosecutors said.

Teeple, Riley and Johnson are the latest to be charged as part of a law enforcement initiative by Bharara’s office and the FBI in New York against insider trading at hedge funds. At least 80 people have been arrested since August 2009 as part of the insider-trading crackdown. Bharara’s office has won convictions of at least 72 people.

The criminal case is U.S. v. Riley, 13-mag-00806, U.S. District Court, Southern District of New York (Manhattan). The SEC case is Securities and Exchange Commission v. Teeple, 13-cv-02010, U.S. District Court, Southern District of New York (Manhattan).

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