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Foundry Networks CIO charged in $29m insider trading scam

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The chief information officer of Foundry Networks, along with two other alleged perps, has been charged with both civil and criminal charges stemming from insider trading during the $3bn buyout of the company by Brocade in 2008.

The Securities and Exchange Commission (SEC) civil charges state that David Riley – who has since left Foundry Networks – tipped off a friend of his, Matthew Teeple, about the forthcoming merger a week before it was announced in July 2008.

Teeple works at a San Francisco hedge fund, which at the time had been betting on Foundry's stock price falling by selling its shares short. But after the conversation, the fund reversed its position and started buying stock.

The SEC estimates that this tip from Riley made the hedge fund $13.6m when Foundry Networks stock rose 32 per cent after the merger announcement, and saved it from $7.6m in losses that would have come through if it had kept its original short position.

This wasn't a one-off, the SEC alleges. It claims that Riley also warned Teeple ahead of a worse-than-expected quarterly financial statement from Foundry Networks in April 2008, and in October told him there were problems with the takeover that would cause stock-price shifts. This information earned the hedge fund $6.9m in profits, the SEC statement claims.

"David 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," said George Canellos, acting director of the SEC's Division of Enforcement in a statement.

Teeple didn't keep the good news to himself; he tipped off numerous other people. One of these, John Johnson, who is currently the chief investment officer for the $6.5bn Wyoming Retirement System, bought 3,900 Foundry Networks shares while on the phone to Teeple discussing the tip, the SEC claims, making $136,000 in illicit profits.

The trio is also facing separate criminal charges in the US Southern District of New York over the insider trading. Johnson has already pleaded guilty to these charges in a separate hearing held on March 18.

"As alleged, 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," said Manhattan US Attorney Preet Bharara in a statement.

"With the charges against them and the plea of John Johnson that we announce today, the ranks of privileged professionals who behave as if they are above the law continue to swell." ®

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