Two years ago, Raj Rajaratnam, the billionaire manager of the Galleon Group hedge fund, was convicted on 14 counts of insider trading. It was the largest hedge-fund insider trading case in history. But that was just the highest profile part of a broad push by the Department of Justice and the Securities & Exchange Commission to crack down on insider trading. It's an investigation that has an interesting backstory that has not received much attention: much of that insider trading happened in the tech industry. And it's a story that is far from over.
In the latest chapter, David Riley, former CIO of Foundry Networks, was arrested and charged in March with conspiracy and securities fraud for allegedly passing non-public material information to a hedge-fund manager right before Foundry was acquired by Brocade Communications in 2008.
Riley is the most recent to be implicated, and it appears he is the first CIO, but he is by no means the first tech exec to be embroiled in the scandals. In fact, he joins quite a crowd of execs who, over the last three years, have been charged and convicted of insider trading. Among them:
- Mark Anthony Longoria, former supply chain manager with AMD
- Ali Hariri, former vice president of broadband carrier networking at Atheros Communications
- Daniel DeVore, former global supply manager at Dell
- Walter Shimoon, former senior director of business development at Flextronics Corp.
- Robert W. Moffat Jr., former senior vice president and group executive for IBM's Systems and Technology Group
- Manosha Karunatilaka, account manager at Taiwan Semiconductor Co.
The government's announcement of Riley's arrest didn't specify the circumstances under which he may allegedly have passed along the information, but many earlier cases involved so-called expert network firms. These firms maintain a pool of industry experts as part-time consultants and match them with clients who want to learn about specific industries, companies, or technologies. Clients are often private investors like hedge funds. In several cases, an expert network firm called Primary Global Research was hiring executives and mid-level managers of public companies as consultants, and paying then hundreds of dollars per hour for participating in phone calls with clients.
According to their plea agreements, these tech executives made loads of money for this part-time work. Longoria, for example, who admitted to divulging confidential information about AMD 's revenue and gross margin in 2008 and 2009, made about $200,000.
It's not clear whether these tech firms had policies about whether employees were allowed to moonlight for such firms. While the expert network firms will tell you they are not designed to ferret out confidential information, it's pretty easy to imagine how a hedge manager might convince, cajole, or maybe even trick a tech employee into revealing more than is appropriate or legal.
Because the story of the involvement of tech professionals in these insider trading cases is not well publicized, I wonder whether corporate compliance offices have made any changes to tighten up the rules or better educate executives and managers about what's legal and not legal to share. If they haven't, they should. Because the government's investigation continues.
With Riley's arrest, "the ranks of privileged professionals who behave as if they are above the law continue to swell," said Manhattan US Attorney Preet Bharara in a press release.
George Venizelos, an assistant director at the FBI, added: "There may be little to distinguish this case from the dozens of others we have made against industry insiders and investment advisers in the past several years. There is certainly nothing unique about the outcome: If you allegedly traffic in inside information, by providing it or trading on it, you will inevitably be found out, charged, and prosecuted."
— Tam Harbert is a freelance journalist based in Washington, D.C.