(March 28, 2013) – A man who on Monday ran $6.5 billion has lost his position over insider trading gains of $136,000.
The chief investment officer to the Wyoming Retirement System (WRS) has pleaded guilty to securities fraud and conspiracy in connection with an insider trading scheme, and will not regain his leadership of the $6.5 billion fund, according to its executive director.
The US Securities and Exchange Commission (SEC) and the Southern District of New York have separately charged John Johnson with illegal trading activities that occurred in 2008—two years before Johnson joined the WRS as a senior investment officer.
Johnson has pleaded guilty to all four criminal counts levied by the US district attorney’s office, according to a joint statement from the Federal Bureau of Investigation (FBI) and Manhattan US Attorney. The SEC’s civil charges of insider trading were filed on Tuesday, March 26.
He faces a maximum of five years in prison and a fine of $272,000 for the district court’s charge of conspiracy to commit securities fraud, and a maximum 20 years in prison and $5 million fine for each of its three substantive securities fraud charges against him.
According to SEC documents, a business acquaintance of Johnson’s named in the suits as Matthew Teeple informed Johnson in advance of the public announcement that technology company Foundry Networks was to be acquired by Brocade, a Delaware-based data and networking product provider. Teeple was allegedly tipped off by David Riley, Foundry’s former chief information officer, who has also been charged by both the district attorney and the federal regulator.
Teeple and Riley have had no interaction with WRS—personal or professional—and the fund has never had a business interaction with any firm named in the lawsuits, according to multiple independent sources.
Johnson has been placed on administrative review leave by the WRS, as the fund’s board and executives absorb what has happened and gather information.
“We didn’t want to engage in any hasty decision making,” WRS Executive Director Thomas Williams told aiCIO on Wednesday evening. “This has happened so incredibly quickly. We want to make sure we have all of the available information before proceeding. All options for John’s future at the fund are really on the table—Except, the one thing that is not an option is for John to continue in his capacity as CIO.”
Johnson has not resigned from the post he has held for the past year-and-half. “And we have not requested him to,” Williams noted.
Neither Teeple nor Riley has pleaded guilty to the charges. Both were arrested in California Tuesday morning, according to the Manhattan district attorney’s office. Teeple’s attorney told aiCIO, “Mr Teeple intends to vigorously defend himself against the government’s allegations.” Lawyers for Riley and Johnson did not respond for requests for comment by press time.
The SEC’s complaint alleges that Johnson called Teeple on the morning of Friday, July 18, 2008, and was told the nonpublic information regarding Foundry’s imminent takeover. “Before this telephone call ended,” the complaint claims, “Johnson purchased 3,900 Foundry shares in six separate family brokerage accounts that he controlled and 325 Foundry call option contracts in his personal trading account. A few minutes after his telephone call with Teeple ended, Johnson also sold short 1,200 Brocade shares based on the commonly held view that an acquiring company’s share price often decreases following a merger announcement.”
Three days later, with Foundry’s stock up 32%, Johnson allegedly sold his holdings and covered his short position on Brocade.
The SEC estimated he earned about $136,000 on the trades.
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“I was absolutely shocked to hear of the charges when John told us over the telephone yesterday,” said Williams. “I am deeply saddened by the situation. John has given absolutely no indication of any wrongdoing in his time here, or a single reason to doubt his integrity.” In July 2010, Williamson and his team hired Johnson as a senior investment officer, removing him from several years of under- and unemployment.
Several people close to him used the same phrase while speculating on Johnson’s impetus for engaging in the fraudulent trades: “Out of desperation.”
“Via that plea, John’s taken responsibility for what he did,” Williams said. “There’s no question on that front. But this all seems to reflect the dire employment situation in 2008 for so many of people in the financial services industry—and John was one of them. He has a large family to which he is extremely devoted.”
WRS has made it clear whose side is it on amid the scandal: the side of Wyoming’s 65,000 current and former public employees who have entrusted the fund with their retirements.
Johnson, by all indications, was also on their side. In July, he gave an interview to aiCIO detailing an overhauled fee structure for external asset managers intended to incentivize managers for benefiting the fund, not simply storing its assets.
“Our experience has been that managers generate alpha and then lose it all, yet they still get paid a high fee because we need to pay an active management fee for passive returns,” Johnson said. “That business model shifts risk to the pension fund rather than the risk being on the fund managers.” He revised the fee structure to pay managers at near-passive rates for beta, and included a hurdle rate over which managers would be handsomely rewarded. “We’ve spoken with a number of pension folks—they’re intrigued and some of them are taking it to their managers. It’s still a new concept,” Johnson noted at the time. “The reality is that the business is changing, and if managers want to be successful, they need to give value to capital providers.” Johnson himself contributed substantial value to the fund: it returned 11.75% annualized over the past three years.
The investigation is ongoing, according to the FBI and US district attorney’s office.