Tags: Foundry Networks | insider trading | Brocade | David Riley

Ex-Foundry Networks Official Guilty of Passing Inside Tips

Thursday, 02 October 2014 02:05 PM

An ex-Foundry Networks Inc. executive was convicted of leaking tips about the company’s $3 billion acquisition by Brocade Communications Systems Inc., helping stock traders reap more than $27 million in profits.

A federal jury in Manhattan today found David Riley guilty of engaging in an insider-trading scheme and of two counts of securities fraud. A mistrial was declared on a third securities-fraud count, which jurors said had them “hopelessly deadlocked.”

U.S. District Judge Valerie Caproni set sentencing for Feb. 6. Securities fraud carries a maximum prison term of 20 years. Riley remains free on bail. Jurors, who began deliberating on Sept. 29, declined to comment after court.

Riley, Foundry’s ex-chief information officer, was accused of tipping Matthew Teeple, then an analyst at Artis Capital Management LP, about the Brocade transaction in July 2008 and about a delay of a shareholder vote approving the deal in October 2008.

Prosecutors said Riley helped Teeple and more than a dozen others who received the information make more than $27 million. Among those tipped was Teeple’s golf pro, according to the government. Teeple pleaded guilty to one count of conspiracy in May. He isn't cooperating with the U.S. and didn’t testify at Riley’s trial.

‘Pipeline’ Forged

“David Riley exploited his position and access to information at Foundry Networks,” Manhattan U.S. Attorney Preet Bharara said in a statement after the verdict. “What Riley forged at Foundry was a pipeline of material, nonpublic information that enabled others to engage in illegal insider trading.”

John Kaley, Riley’s lawyer, said in his closing argument that the government’s case had “gaps” in it and that Teeple had many other sources of illegal tips.

“We’re enormously disappointed by the verdict, but we’re optimistic about our chance on appeal and that the conviction can be set aside,” Kaley said. “We intend to keep fighting for our client because he is innocent.”

Riley is one of at least 87 people convicted of insider trading in a seven-year crackdown by U.S. prosecutors and the New York office of the Federal Bureau of Investigation.

In July, the government saw its first acquittal when a federal jury cleared Rengan Rajaratnam, the brother of Galleon Group LLC co-founder Raj Rajaratnam, of insider trading charges.

One Charge

Late Wednesday, jurors in the Riley case told the judge they were struggling to reach a verdict on a securities fraud charge in which Riley was accused of tipping Teeple about delays in the closing of the Brocade deal, helping Artis avoid losses about $4.3 million in October 2008.

Caproni gave the jurors additional legal instructions this morning and they deliberated further before telling her they remained deadlocked. The U.S. didn’t immediately say whether it would re-try Riley on the outstanding count.

Prosecutors said at trial that Riley had access to some of Foundry’s most closely guarded financial data as well as news about the Brocade deal. Seeking cash for a startup he was planning, he passed the tips hoping for access to Silicon Valley investors that Teeple knew, prosecutors said.

‘Riley Knew’

“Riley knew that this information could help investors get tomorrow’s news today,” Assistant U.S. Attorney Sarah McCallum told the jury in her closing argument. “He knew they could make a killing off it.”

Riley logged into Foundry databases where revenue numbers were stored while he was on the phone with Teeple, who often traded during the calls, prosecutors said.

Kaley, the defense lawyer, told jurors Riley didn’t have access to the kind of precise data Teeple traded on. He said Teeple had other sources at Foundry and prosecutors took a “leap” in assuming his client was the culprit.

“Riley did not know the price or the timing” of the Brocade deal, Kaley said. “If there’s no proof that he had it, then there can be no proof that he leaked what he didn’t have.”

Among the government’s witnesses was John Johnson, an unemployed day trader who testified about trades he made in his personal account based on information allegedly leaked by Riley. Karl Motey, a former technology analyst, also told jurors about his trades on the information.

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An ex-Foundry Networks executive was convicted of leaking tips about the company's $3 billion acquisition by Brocade Communications, helping stock traders reap more than $27 million in profits.
Foundry Networks, insider trading, Brocade, David Riley
Thursday, 02 October 2014 02:05 PM
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