7 Indian-origin persons charged in million dollar insider trading scheme

Seven Indian-origin persons have been charged by federal authorities with insider trading in a scheme through which they made over a million dollars in illegal profits.

Hari Prasad Sure, 34, Lokesh Lagudu, 31 and Chotu Prabhu Tej Pulagam, 29, are friends and worked as software engineers at Twilio, a San Francisco-based cloud computing communications company, the Securities and Exchange Commission said Monday.

The complaint said Sure tipped his close friend Dileep Kumar Reddy Kamujula, 35, who successfully traded in Twilio's options. Lagudu similarly tipped his girlfriend Sai Nekkalapudi, 30 with whom he lived, and he also tipped his former roommate and close friend Abhishek Dharmapurikar, 33. Pulagam tipped his brother Chetan Prabhu Pulagam, 31. All the seven defendants live in California.

The SEC announced insider trading charges against the seven individuals for allegedly generating more than USD 1 million in collective profits by insider trading ahead of Twilio's positive first quarter 2020 earnings announcement on May 6, 2020.

According to the SEC's complaint, Sure, Lagudu and Chotu Pulagam had access to various databases relevant to Twilio's reporting of revenue. As alleged, around March 2020, they learned through the databases that Twilio's customers had increased their usage of the company's products and services in response to health measures taken in light of the Covid-19 pandemic, and concluded in a joint chat that Twilio's stock price would rise for sure.

The SEC's complaint alleges that despite receiving a company policy that prohibited them from insider trading, Sure, Lagudu and Chotu Pulagam knowingly tipped off, or used the brokerage accounts of Kamujula, Nekkalapudi, Dharmapurikar and Chetan Pulagam to trade Twilio options and stock in advance of its May 6, 2020 earnings announcement while in possession of the confidential information concerning customer usage.

According to the complaint, the scheme generated more than USD 1 million in illegal trading profits.

The SEC complaint said that Sure, Lagudu and Chotu Pulagam communicated at times in Telugu, a language used frequently in parts of India.

From late March to early May 2020, they engaged in discussions about the upcoming earnings announcement within a private chat channel they created at Twilio.

On several occasions between late March and early May 2020, before Twilio's public earnings announcement, Sure, Lagudu and Chotu Pulagam used internal chat channels to discuss in Telugu whether Twilio might exceed market expectations in its quarterly report of earnings, due in May 2020.

The complaint said that armed with valuable inside information, they had obtained from Twilio, Sure, Lagudu and Chotu Pulagam began passing tips to their family and friends through phone calls and in-person visits in advance of Twilio's earnings announcement on May 6, 2020.

"We allege that this insider trading ring took advantage of valuable revenue information related to the pandemic at a San Francisco tech company," said Monique C. Winkler, Acting Regional Director of the SEC's San Francisco Regional Office. "We are holding these alleged tippers and tippees accountable for their roles in the scheme.

The SEC complaint added that Kamujula, Nekkalapudi, Dharmapurikar, and Chetan Pulagam were themselves employees of other publicly traded companies, and they understood it was improper for the insiders to tip another person to trade securities on the basis of material, nonpublic information. Sure, Lagudu and Chotu Pulagam used their friends and family to profit personally from their insider trading scheme and to avoid detection.

On May 4, 2020 (just two days before the scheduled Twilio earnings announcement), Sure, Pulagam, and Chotu Pulagam discussed in the chat channel their anticipation that Twilio's stock price, which was then trading around USD 110 per share, would dramatically increase following the earnings announcement and readied themselves to sell their own company restricted stock units post-announcement.

Sure noted [l]ooks like [the stock price] is going to be $150, to which Chotu Pulagam responded Miillionaireeeeee, the complaint said.

The SEC's complaint, filed in the Northern District of California, charges each of the defendants with violating antifraud provisions of the Securities Exchange Act. The US Attorney's Office for the Northern District of California also announced criminal charges against Kamujula.