The SEC brought an insider trading enforcement action against Artis Capital Management, L.P. (Artis) and Michael W. Harden. Artis, a San Francisco-based investment adviser that advised multiple hedge funds. The SEC found that its senior research analyst, Harden, failed reasonably to supervise Matthew Teeple, an Artis employee who procured material nonpublic information from an insider at a public company. Artis, according to the SEC, also failed to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information consistent with the nature of its business.
In 2007, Artis hired Teeple as a research analyst to evaluate potential investments in software, semiconductor, networking, and other technology companies. Teeple, who had previously worked at a networking technology company himself, made securities trading recommendations based on information that he learned from contacts who worked at various technology companies. Unlike a typical research analyst at a hedge fund advisory firm, Teeple did not construct analytical models regarding the financial performance of the companies he covered, did not provide written reports supporting his recommendations to buy or sell the securities of such companies, and did not maintain research files available for review by his supervisor, Harden, or others at Artis.
The SEC stated that on at least two occasions in 2008, Teeple obtained material nonpublic information about the publicly traded company Foundry Networks, Inc. from an employee of Foundry. On both occasions, Teeple provided information regarding Foundry to Artis, which executed timely and profitable trades in advance of public announcements by Foundry.
On both occasions, 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. Notwithstanding the information provided by Teeple, Harden did not question Teeple about the source of his information or ask the CCO or any other colleagues at Artis to look into the matter.
By failing to respond appropriately to red flags that should have alerted them to risks of potential insider trading by Teeple, the SEC stated that Artis and Harden failed to reasonably supervise Teeple with a view to detecting and preventing his violations of the federal securities laws.
Section 204A of the Advisers Act requires investment advisers subject to Section 204 to establish, maintain and enforce written policies and procedures, reasonably designed, taking into consideration the nature of their business, to prevent the misuse of material nonpublic information. Teeple’s interactions with his technology industry sources created a substantial risk that material nonpublic information would be obtained and misused, and necessitated the establishment of reasonable procedures to prevent such misuse.
Although Artis had written policies and procedures that prohibited the receipt and use of material, nonpublic information, the firm according to the SEC failed to adopt policies or procedures to address the particular risk presented by Teeple’s frequent interaction with contacts at public companies in whose securities Artis traded.
In addition, the SEC stated that Artis failed to appropriately enforce its policies and procedures concerning the receipt and use of material nonpublic information. During the relevant period, Artis had a written policy that required employees to bring to the attention of the firm’s CCO any potential material nonpublic information received from any source. During 2008, despite at least two instances in which Teeple provided Artis with information regarding Foundry just prior to material announcements by the company, these events were not brought to the attention of the CCO.
Click here to access the enforcement action.