SEC Whacks Hedge Fund Adviser for Inside Trading

WASHINGTON (CN) — San Francisco-based hedge fund adviser Artis Capital Management will disgorge more than $6 million in profits and interest and pay another $2.6 million in fines for failing to detect an employee's inside trading, the SEC said Thursday.

Senior research analyst Michael Harden failed to "reasonably supervise" Matthew Teeple, "who procured material nonpublic information from an insider," the SEC said in an administrative order.

Teeple was sentenced to 5 years in prison in 2014 for conspiracy to commit securities fraud, and ordered to pay $300,000 in fines and disgorgement.

Harden was fined $130,000 in the SEC's Thursday order.

The SEC said that at least twice "Teeple shared information with Harden that should have caused a reasonable supervisor to question whether Teeple had improperly obtained material nonpublic information from a corporate insider."

The inside trading began when a friend of Teeple's, David Riley, began sharing internal sales figures with him from his organization, Foundry Network. Riley was a do-defendant in SEC v. Teeple and also charged in a parallel criminal case. He was sentenced in April 2015 to 6½ years in federal prison and ordered to pay $10,000 in fines and disgorgement.

Riley tipped Teeple in July 2008 that Foundry Network was to be acquired by Brocade Communications Network for $3 billion. "Minutes after leaving his meeting with Riley, Teeple telephoned Harden and the two men spoke for eight minutes," the SEC said in the new order.

Teeple later testified under oath that Riley told him the "approximate day on which [the Foundry/Brocade] acquisition would be announced and the approximate purchase price," and relayed the information to Harden, the SEC says.

It adds that while Harden and Teeple were still on the phone, "Artis, which had previously established a short position in Foundry stock, began buying Foundry Stock and call options, selling short Foundry put options that reflected a positive view of the stock's figure price movement."

Five days later, when Brocade made the announcement, Foundry stock jumped and Artis's hedge funds profited and avoided losses of $21 million. Artis gave Teeple a $1 million bonus when the year ended.

Three months after the public announcement, however, "unbeknownst to the public," Teeple learned that Brocade was having trouble securing the $400 million it needed to close the deal. Riley gave Teeple that information on the morning of Oct. 16, 2008, whereupon Teeple called Harden and within six minutes Artis began selling off its hedge funds' bullish position in Foundry stock. By the end of day, it had sold all $18 million of its hedge funds' Foundry stock, this time "avoid(ing) trading losses of approximately $43 million," the SEC said.

A spokesman for Artis could not be reached by telephone Thursday.

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