Federal authorities arrested David Riley, 47, a former vice president at Foundry Networks Inc., a firm in Santa Clara, Calif., that made networking hardware before it was acquired by Brocade Communications Systems Inc. for about $3 billion in December 2008, and analyst Matthew Teeple, 41, of San Clemente, Calif. Each was charged in federal court in Manhattan with conspiracy to commit securities fraud and three counts of securities fraud. If convicted, each could face up to 65 years in prison.
U.S. Attorney Preet Bharara said Riley and Teeple, who are friends, engaged in a "high-stakes game that has repeatedly proven to be unwinnable." He added that the case shows that "the ranks of privileged professionals who behave as if they are above the law continue to swell."
George S. Canellos, acting director of the Securities and Exchange Commission, which filed civil charges, said Riley "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."
Prosecutors said Teeple worked for an investment advisory firm hired by a family of hedge funds in San Francisco when Riley told him on July 16, 2008, about the pending acquisition of Foundry by Brocade. The deal was publicly announced five days later. Within two hours of the call, Teeple telephoned an investment adviser, who began purchasing a large amount of Foundry stock even before he got off the phone, prosecutors said.
The tip led the investment adviser, who wasn't identified in court papers, to earn $13.6 million in illegal profits and avoid losses of about $7.4 million from positions in Foundry he discarded after learning the news, the government said. Authorities said Teeple also provided information about Brocade's plans to acquire Foundry to two acquaintances, including John Johnson, 46, of Arvada, Colo., a Denver-based investment adviser who made $136,000 illegally with the tip. He pleaded guilty this month to conspiracy and securities fraud charges.
Teeple was arrested Tuesday in San Clemente, and Riley was arrested in San Jose. Each was awaiting initial court appearances in California.
Nathan Hochman, Teeple's lawyer, said: "Mr. Teeple intends to vigorously defend himself against the government allegations."
A message left with a lawyer for Riley wasn't immediately returned.