Types Of SEC Cases: Failure To Prevent Insider Trading
Hedge Fund Advisor And Employee Settle SEC Charges For Failure To Prevent Insider Trading
The SEC charged a hedge fund advisory firm and one of its Senior Research Analysts with failure to prevent insider trading. In its Administrative Order, the SEC alleged that Artis Capital Management (“Artis”) and Analyst Michael W. Harden (“Harden”) failed to properly respond to irregular trading activity by an employee and take appropriate action.
The SEC Order
Senior Research Analyst Ignored Procedures To Prevent Insider Trading
The basis for the SEC’s charges revolved around the actions of an Artis research analyst, Matthew Teeple (“Teeple”). Teeple was tasked with researching and providing trading recommendations on companies in the information technology sector, including Foundry Networks, Inc. (“Foundry”). According to the SEC, Teeple did not build analytical financial models that tracked the financial performance of the companies that he covered. He did not provide written reports that supported his buy and sell recommendations. Nor did he provide research files that were reviewable by his superiors or Artis. On at least two occasions, Teeple provided information about Foundry to Artis. Artis relied on that information to execute profitable trades in advance of public announcements about Foundry. In both instances, Teeple discussed his information with his supervisor, Harden. The SEC claimed that the information shared by Teeple should have caused a reasonable supervisor to question the appropriateness of Teeple’s information. That should have led to a further inquiry to determine if the information was nonpublic information that had been provided by a Foundry insider. According to the SEC, such actions would have allowed Harden to prevent insider trading. Not only did Harden not take these actions, but he failed to report the information to Artis’s Chief Compliance Officer or any other senior personnel who could have investigated the matter.Insufficient Policies And Procedures To Prevent Insider Trading
In addition to Harden, the SEC charged Artis with failing to establish, maintain and enforce written policies and procedures reasonably designed to prevent insider trading through the misuse of material nonpublic information. Teeple’s regular contact with technology industry sources at public companies created substantial risk that material nonpublic information could be obtained and used. Therefore, reasonable procedures were required to prevent the misuse of such information. Even though Artis had written policies and procedures in place that addressed these issues, according to the SEC, Artis failed to properly enforce those policies and procedures. In a press release, the Senior Associate Director of the SECʼs New York Regional Office stated:Hedge fund advisory firms and supervisors must take all reasonable measures necessary to prevent insider trading, yet Artis Capital and Harden failed to take any action at all in response to Teepleʼs highly profitable and suspiciously-timed trading recommendations.
The SEC’s press release
Disgorgement And Penalties
Artis and Harden agreed to settle the charges with the SEC as follows:- $5,165,862 disgorgement of the illicit trading profits (Artis)
- $2,582,931 penalty (Artis)
- $1,129,222 interest (Artis)
- $130,000 penalty (Harden)
By disgorging the illicit profits that Artis Capital obtained through Teepleʼ s misconduct, this settlement ensures that the firm and Harden will not be rewarded for their negligence.
Additionally, Harden was suspended from the securities industry for 12 months. Teeple and his source, David Riley, were charged by the SEC in a broader insider trading matter. In addition, they were prosecuted by criminal authorities and given prison sentences for their actions.Whistleblowers Can Report Insider Trading Violations To The SEC
This case illustrates some types of misconduct that could give rise to SEC whistleblower cases if reported to the Commission through the SEC whistleblower program. However, the SEC has not made any public statement as to whether this case was itself an actual SEC whistleblower case. The SEC Office of the Whistleblower posts Notices of Covered Action (“NoCA”) for Commission actions where a final judgment or order results in monetary sanctions exceeding $1 million. The NoCA list does not disclose if a particular Enforcement action was brought as the result of an SEC whistleblower case, tip, complaint, or referral being filed with the Commission.Additional Information
For more information about the failure to prevent insider trading, click on the links below:- The SEC’s Order in SEC v. Artis and Harden. (External link to the SEC’s website.)
- The SEC’s Press Release about SEC v. Artis and Harden. (External link to the SEC’s website.)
