ADVISORY FIRM, SUPERVISOR SANCTIONED FOR ENABLING INSIDER TRADING

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A hedge fund advisory firm and a senior research analyst agreed to settle SEC charges related to their failures to detect insider trading by one of their employees. As alleged, Artis Capital Management (Artis) failed to maintain adequate policies and procedures to prevent insider trading at the firm by a firm employee. According to the SEC allegations, Artis and Michael W. Harden, the supervisor, failed to respond appropriately to red flags that should have alerted them to the misconduct.

The SEC previously charged the employee, Matthew G. Teeple, in connection with its broader investigation into expert networks and the trading activities of hedge funds. Teeple is currently serving a five-year prison term for fraud.

As described by the SEC, Teeple had previously worked at a networking technology company, and made securities trading recommendations based on information that he learned from contacts who worked at various technology companies. He did not construct analytical models regarding the financial performance of the companies he covered, and did not provide written reports supporting his recommendations to buy or sell the securities of these companies.

Teeple worked out of his Southern California home, and spent much of his time communicating with industry sources about the technology companies that he covered. He traveled frequently for in-person meetings with his sources. Artis did not require Teeple to report his interactions with employees of public companies, and it did not have policies to track or monitor these interactions.

Teeple also did not maintain research files that could be reviewed by the firm. In addition, Teeple shared information with Harden, his supervisor, on at least two occasions that should have caused a reasonable supervisor to question whether the employee had improperly obtained material nonpublic information from a corporate insider. Harden did not question Teeple about the source of his information or ask the chief compliance officer or any other colleagues at Artis to look into the matter.

The SEC found that Teeple’s frequent 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 failed to adopt policies or procedures to address the particular risk presented by Teeple’s specific conduct. In addition, Artis failed to appropriately enforce its policies and procedures concerning the handling of material nonpublic information. During the relevant period, the firm was aware of Teeple's activities and took no steps to bring this information to the chief compliance officer.

“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 Teeple’s highly profitable and suspiciously-timed trading recommendations,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.

Artis agreed to disgorge $5.1 million in illicit trading profits, plus interest of $1,129,222. The firm also agreed to pay a penalty of $2.58 million. Harden agreed to pay a $130,000 penalty and a 12-month industry suspension.

In the Matter of Artis Capital Management, L.P. and Michael W. Harden, SEC Release No. IA-4550 (Oct. 13, 2016).