The US Securities and Exchange Commission sued Andreas “Andy” Bechtolsheim, the founder of Arista Networks, Inc., alleging he engaged in illegal insider trading. In settlement of the SEC’s enforcement action, Bechtolsheim consented to pay an approximate $1 million civil monetary penalty.
Per the SEC’s federal court complaint, Bechtolsheim is alleged to have misappropriated inside information – legally defined as material nonpublic information – concerning the then imminent acquisition of Acacia Communications, Inc. In particular, the SEC contends that Bechtolsheim, at the time the chair of Arista Networks, became aware of Acacia’s imminent acquisition on July 8, 2019, via his and his company’s long-term relationship with another technology company that was also contemplating the acquisition of Acacia, with which Bechtolsheim discussed the transaction.
Right after becoming aware of this inside information, the SEC contends that Bechtolsheim traded options in Acacia in the accounts of two other individuals, a family member and an associate. On July 9, 2019, the next day, but prior to the opening of the stock market, Acacia and Cisco publicly announced that Cisco would acquire Acacia at $70 per share. After this announcement and the open of the markets, Acacia’s stock price rose over 35%, which the SEC alleged allowed Bechtolsheim to generate trading profits of over $415,000 from the sale of the options in the brokerage accounts of his family member and associate.
The SEC’s enforcement complaint alleged that Bechtolsheim violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, which are anti-fraud provisions of the federal securities laws. In resolving the insider trading charges, Bechtolsheim, without admitting or denying the SEC’s insider trading charges, consented to the imposition of a final judgment, which would order the entry of a permanent injunction against his future violations of the anti-fraud provisions under the Securities Exchange Act of 1934, a five-year prohibition against serving as an officer or director of a public company, and the payment of a civil penalty of $923,740. The settlement terms are subject to Court approval.
While this misappropriation theory-based insider trading case is not unusual on its facts, it is unusual in that the SEC did not seek disgorgement (the return of ill-gotten gains, to wit: trading profits) as a financial remedy. In a typical SEC insider trading settlement, the SEC seeks the return of the profit made or loss avoided from the insider trading, prejudgment interest on that amount, in addition to a one-time civil penalty equal to the amount of disgorgement. That was not the case here. Rather, it appears the SEC sought only a one-time civil penalty equal to the disgorgement amount times two, plus prejudgment interest. While the net monetary result is the same, it is a clear indication to me that the SEC is increasingly concerned about the Supreme Court’s decision in Liu, and the recent decisions explicitly affirming it handed down in the Second and Eleventh Circuits, which requires disgorgement to be tied to demonstrable investor loss, which is very difficult to prove in an insider trading case. I believe we will continue to see the SEC pursue this relatively new settlement structure in its insider trading cases in a clear effort to avoid the Liu investor loss requirement, which will also make the SEC’s efforts to collect disgorgement much more difficult in other non-insider trading cases.
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David Chase, Esq. is a SEC defense insider trading lawyer who previously investigated and prosecuted insider trading cases while he served as Senior Counsel in the SEC’s Enforcement Division in the late 1990s. David represents those being investigated for insider trading, or who have received an SEC insider trading subpoena around the nation, as well as internationally. You may contact David toll-free at: 800-760-0912 for a confidential consultation regarding insider trading, or by e-mail at: david@davidchaselaw.com, and you can visit the Firm’s website for more information and content at: www.davidchaselaw.com.
