Ex-Palo Alto Networks IT Administrator Indicted For Insider Trading

'We are committed to the highest standards of ethical and legal conduct, and expect our employees to adhere to these same standards,” Palo Alto Networks said in a statement. 'This issue involved two non-executive level employees and two contractors, who were either terminated or had previously left the company. Palo Alto Networks has not been charged in any of these actions.’

A former Palo Alto Networks IT administrator was indicted Tuesday and accused of spearheading an insider trading scheme that allegedly generated $7 million in illegal profits.

A federal grand jury indicted Janardhan Nellore, 42, on one count of conspiracy to commit securities fraud, six counts of securities fraud, and three counts of aggravated identity theft for reportedly using his IT credentials and work contacts to obtain highly confidential information about Palo Alto Networks’ quarterly earnings and financial performance.

He then allegedly either traded the company’s securities based on the confidential information or tipped off four of his friends, who also traded based on the information. Nellore was tasked with supporting Palo Alto Networks’ internal financial databases as an IT administrator from 2012 until his termination in 2019. Three of the four friends also had ties to Palo Alto Networks as an ex-employee or ex-contractor.

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“Corporate insiders who abuse their access to inside information for personal gain will face the consequences for their actions, whether they sit in the executive suite or the IT department,” U.S. Attorney David Anderson said in a statement. “The integrity of our financial markets requires everyone to follow the rules.”

An alleged accomplice and formed Palo Alto Networks contractor, Sivannarayana Barama, 45, was also indicted on conspiracy to commit securities fraud and securities fraud. Each of those charges carries a maximum sentence of 25 years in prison and a $250,000 fine, while the aggravated identity theft charges carry a maximum sentence of two years in prison and a $250,000 fine.

In addition to the criminal indictments, the U.S. Securities and Exchange Commission filed insider trading charges in civil court against Nellore, Barama and the three other alleged co-conspirators—Ganapathi Kunadharaju, 41; Saber Hussain, 42; and Prasad Malempati, 50. Malempati was employed by the Palo Alto Networks IT group from 2013 to 2016, while Hussain was previously a contractor for the company.

“We are committed to the highest standards of ethical and legal conduct, and expect our employees to adhere to these same standards,” Palo Alto Networks said in a statement. “This issue involved two non-executive level employees and two contractors, who were either terminated or had previously left the company. Palo Alto Networks has not been charged in any of these actions.”

Palo Alto Networks said it has been and is continuing to fully cooperate with authorities. The company’s stock was down 67 cents, or 0.29 percent, in after-hours trading Thursday to $230 in after-hours trading Tuesday.

Lawyers for Nellore, Barama and Hussain could not immediately be reached for comment by either CRN or Reuters. Kunadharaju’s counsel told Reuters his client has been fully cooperating with the SEC and is optimistic about the outcome, while a lawyer for Malempati noted to Reuters that his client is not in custody even though Nellore has been in custody since May of this year.

After Nellore was interviewed by the FBI on May 7 in connection with the investigation, prosecutors allege he purchased one-way tickets to New Delhi, India, for himself and his family on a flight departing the very next morning. FBI agents reportedly intercepted Nellore while he was trying to board the flight. At that point, prosecutors said Nellore was detained as a flight risk.

Following Nellore’s promotion in 2015, he became one of just five individuals with the highest level of access to Palo Alto Networks’ Systems, Applications & Products in Data Processing database, which was essential to the process by which the company determined its quarterly financial results, such as revenue, so that it could report those results publicly, according to the SEC complaint.

As a result, Nellore reportedly had access to nonpublic information about Palo Alto Networks’ quarterly financial performance, including target and actual billings, bookings and growth rate. He is accused of trading the company’s securities using inside information through “straddle trades,” where he put options before earnings announcements and sold the options after the announcements.

“The defendants unlawfully made millions of dollars by concocting a complex trading scheme using valuable inside information to profit by trading ahead of authorized disclosures to the investing public,” FBI Special Agent in Charge John Bennett said in a statement. “By arresting these individuals, we set a clear example that we will not tolerate those who undermine the integrity of the markets and fair trade.”

The U.S. Attorney’s office alleges that Nellore and his four friends placed approximately 800 straddle trades on Palo Alto Networks securities between March 2015 and September 2018, generating illegal profits in excess of $7 million. When making non-straddle trades of Palo Alto Networks securities or trading in other stocks, prosecutors allege the five co-conspirators lost money.

To evade detection, the SEC alleges that Nellore insisted the insider trading ring use the code word “baby” in texts or email about Palo Alto Networks’ stock, advising they “exit baby” or “enter few baby.” The complaint also claims that certain traders kicked back profits to Nellore in small cash transactions intended to avoid bank scrutiny and reporting requirements.

“Nellore and his friends exploited Nellore’s access to valuable earnings information and attempted to hide their misconduct using code words and carefully tailored cash withdrawals,” SEC San Francisco Regional Office Director Erin Schneider said in a statement. “This case highlights our use of enhanced data analysis tools to spot suspicious trading patterns and identify the traders behind them.”