SEC Charges Palo Alto Networks Ex-Employee and Conspirators with Insider Trading

The Securities and Exchange Commission charged five people. including multiple ex-employees and contractors of Palo Alto Networks (PANW), with insider trading on Tuesday (Securities And Exchange Commission v. Nellore et al 5:19-cv-08207). The case has been assigned to Judge Susan van Keulen in the California Northern District Court.

PANW is a cloud-computing security firm that provides its customers with a security operating platform. Their common stock is registered with the SEC and its securities are traded on the New York Stock Exchange. Market Watch reports  that PANW shares are “particularly volatile after earnings reports.” Janardhan Nellore was an IT administrator for PANW and is accused of using confidential information he received in the course of his work about PANW’s earnings to inform his and his co-conspirators’ trades. As an IT administrator for PANW, one of Nellore’s responsibilities was to provide support for the company’s financial databases, which were integral parts of generating the earnings reports.

The insider trading ring began in 2015 after Nellore was promoted at PANW and gained the highest level of access possible to the Systems, Applications & Products in Data Processing (“SAP”) database, which is used to determine quarterly financial results which are then publicly reported. As part of his job, Nellore would assist in the process of generating these reports, which took around six weeks. Nellore was reminded in emails that he was subject to the company’s quarterly trading blackouts, which began around this six-week window and ended two full trading days after the PANW earnings report came out.

The SEC complaint states that between 2015 and 2019, when Nellore was fired from PANW, Nellore traded on this non-public information and shared this information with Sivannarayana Barama, Ganapathi Kunadharaju, Saber Hussain, and Prasad Malempati; all of whom are friends with Nellore. Barama and Hussain worked are both software engineers who worked as contractors for PANW. Malempati was employed in PANW’s IT group with Nellore. Kunadharaju is also a software engineer but did not work for PANW at any point. He and Nellore attended college together in India.

Nellore used the accounts of Hussain, Kunadharaju, and Kunadharaju’s wife to conceal his trades. Nellore arranged that in exchange for access to the accounts he would make trades for his friends and they would keep the profits for any of the trades made with their money, while Nellore would take whatever money he earned for himself using his own money in their accounts. Hussain and Kunadharaju would withdraw cash in amounts below $10,000 to give back profits to Nellore.

Nellore has also been facing criminal charges for aggravated identity theft in connection with using someone else’s brokerage account to make trades in PANW securities. These charges were brought against Nellore by the U.S. Attorney’s Office for the Northern District of California in May 2019 (USA v. Nellore 5:19-mj-70712)

In a more direct trading interaction, Malempati exchanged his personal stock research on PANW’s anticipated movements for Nellore’s inside information. Nellore used Malempti’s research to build trading strategies. Nellore seemingly provided Barama the tips solely on the basis of friendship although evidence suggests that Nellore asked Barama for a loan at one point.

The defendants would often make trades within minutes or hours of each other, usually trading options on PANW securities. Nellore would advise his friends on strategies and price points to buy and sell options at. Nellore would communicate with his friends via phone call, text, and in person. Many phone calls would occur between Nellore and the others within a few hours of them making trades. He encouraged using the code word “baby” when referring to the “PANW” such as in texts which read “exit baby” and “enter few baby”. They did not use codes for other securities. At the height of the trading scheme in 2017, the friends had collectively made $7 million in profits. In the following few years, they continued to trade based on insider information with varying levels of success.

The Federal Bureau of Investigation approached Nellore on May 7 in the course of their investigation into the trades made by Nellore. By the next day, Nellore had bought one-way tickets for himself and his family and was stopped at the airport by the FBI as he was attempting to board a flight to India.

The SEC asks the court to find that the defendants violated Section 10(b) and Rule 10b-5 of the Exchange Act, that they and any of their employees or agents on their behalf be prevented from further violations, that they expel with prejudgment interest all profits made from violations of the act, and be made to pay civil penalties as is warranted by Section 21A of the Exchange Act. Erin E. Schneider, Director of the SEC’s San Francisco Regional Office commented on the investigation that “This case highlights our use of enhanced data analysis tools to spot suspicious trading patterns and identify the traders behind them.”