Arista Networks founder settles SEC insider trading charges

The SEC alleged illegal trade using knowledge gained in advance on Cisco System’s $2.6 billion offer to buy Acacia Communications in 2019.

Andreas ‘Andy’ Bechtolsheim, the co-founder of Sun Microsystems Inc and Arista Networks Inc, has been barred by the SEC from serving as an executive or board member of a public company for five years after the agency accused him of insider trading this week.

The SEC alleged in a lawsuit filed Tuesday in federal court in California that Bechtolsheim illegally traded on Cisco Systems Inc.’s $2.6 billion offer to buy Acacia Communications Inc in 2019, a deal he had learned about in advance. Under the settlement, which includes a $923,740 fine, Bechtolsheim did not admit to or deny the allegations.

Besides being the business’s founder, Bechtolsheim had served on the board and was the company’s “chief architect” responsible for advanced artificial intelligence, silicon and optics initiatives.

The charges did not involve the trading of Arista securities, but Arista stock fell amid the news on Tuesday.

SEC allegations

The SEC said Bechtolsheim learned of Cisco’s proposed purchase of Acacia, an optical component maker, from an employee of a different, unnamed, company. The employee talked with him about a potential last-ditch bid the other company was considering making for Acacia, according to the suit.

Bechtolsheim then used both a relative’s and an associate’s brokerage accounts to purchase options of Acacia, the SEC claimed. When the Cisco offer was announced a day later, the trades turned a profit of more than $400,000.

Cisco eventually bought Acacia for $4.5 billion in 2021 after about a year of negotiations.

“We allege that Bechtolsheim, while serving as the chairman of a publicly traded company, abused the trust of a longtime business contact who had shared highly sensitive information about an imminent corporate acquisition,” said Joseph G Sansone, chief of the SEC’s Market Abuse Unit, in a statement.

“We will continue to pursue and prosecute misconduct by trusted insiders at all levels of the corporate hierarchy,” he added.

An Arista representative issued a statement, saying: “While the SEC announcement did not involve any trading in Arista securities, Arista takes compliance to the company’s code of conduct and insider trading policy seriously. Arista will respond appropriately to the situation.”

“We allege that Bechtolsheim, while serving as the chairman of a publicly traded company, abused the trust of a longtime business contact who had shared highly sensitive information about an imminent corporate acquisition.”

Joseph G. Sansone, chief of the SEC’s Market Abuse Unit

Before Bechtolsheim founded Arista with Kenneth Duda and David Cheriton in 2004, he co-founded Sun Microsystems in 1982 and Granite Systems in 1995. He was also an early investor in Google.

Arista sells computer network switches that speed up communications among racks of computer servers packed into huge data centers. These internet data centers are designed to speed up computing horsepower when demand surges, which is incredibly important as the demand for emerging artificial intelligence tools spurs investments by technology companies and cloud computing giants.

The incredible demand is fueling increasing investment, partnerships and other dealmaking, which enhances the likelihood of everyone trying to get their fair share.

GRIP comment

Businesses must institute effective safeguards and monitoring to detect and quickly remediate any insider trading activity in their business lines.

Regulatory agency officials cannot be clearer about the importance of insider trading to them in terms of their exams and enforcement actions, and they are determined to seek penalties against businesses or individuals as the case requires.

Businesses should consider identifying those people with knowledge of confidential information, ensuring they understand that there is the potential for it to become inside information – so, of the material, nonpublic variety that would have a significant effect on the price of a financial instrument if made public. And explain to them that they should be prepared for certain responsibilities to kick in if this occurs.

It’s critical that employees acknowledge in writing their legal and regulatory duties relating to the use of inside information and preventing insider trading to keep it top of mind, so they remember they are not just passing helpful tips to friends and associates here. And then you have created a document trail of your efforts to prevent such trading from occurring.

Regular, automated reminders would go a long way – with no one in the food chain exempt from getting the reminders and attesting to their compliance with these policies.

And, of course, actively monitoring trades is an important way to flag suspected insider trading. If there are trades that do not fit with their regular trading patterns, this could be an indication that they are acting on inside information, and at least merits a further inquiry.

Plus, there’s a fintech tool for it! These tools allow you to set parameters for acceptable trades, helping you exclude those involving products on which your firm has inside information, among other helpful capabilities.