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In Silicon Valley, you can be worth billions and it's not enough| GuyWhoKnowsThings


Andreas Bechtolsheim doesn't like to waste time. The businessman made one of the most famous investments in the history of Silicon Valley: the initial $100,000 that he financed a search engine called Google in 1998, while heading to work one morning. It was only a few minutes.

Twenty-one years later, Bechtolsheim may have seized a different kind of opportunity. He received a phone call about the impending sale of a technology company and allegedly traded on the confidential information, according to charges filed by the Securities and Exchange Commission. The profit for a few minutes of work: $415,726.

The history of Silicon Valley is full of big bets and steep falls, but rarely has anyone traded their reputation for such a seemingly small reward. For Bechtolsheim, $415,726 was equivalent to a quarter rolling behind the couch. he was classified No. 124 on the Bloomberg Billionaires Index last week, with a fortune estimated at 16 billion dollars.

Last month, Mr. Bechtolsheim, 68, settled insider trading charges without admitting bad actions. He agreed to pay a fine of more than $900,000 and will not serve as an officer or director of a public company for five years.

Nothing in his past seems to have brought him to this worrying point. Bechtolsheim was one of those who gave Silicon Valley its reputation as an engineer's paradise, a place where getting rich was something that happened by accident.

“He cared so much about creating great technology that he would buy a house, not furnish it, and sleep on a futon,” said Scott McNealy, who joined Bechtolsheim four decades ago to create Sun Microsystems, a maker of workstations and computers. servers that were a technological powerhouse for a long time. “He didn't measure himself with money.”

Bechtolsheim was not trading for himself, according to the SEC complaint. Instead, he used the accounts of an associate and a family member. Perhaps this was a subterfuge, or perhaps it was a gift. The investor and his lawyer did not respond to emails seeking comment.

Insider trading is often “a crime of passion,” said Michael D. Mann, a former SEC official. “It is based on information that is only valuable for a very short period of time. The moment you get it, greed takes over, so you go out and trade it. A rational person would say, 'Is it really worth the risk?'”

Buying options on your own company just before a merger is announced is a red flag to regulators and is relatively easy for them to discover. Trading in someone else's account, as Bechtolsheim was accused, or in a company that is not directly involved in the deal but will likely benefit from it, should seem less risky.

Insider trading prosecutions are relatively rare, making it difficult to determine what is actually happening in headquarters, executive suites and office parks. But researchers who analyze business data say corporate executives generally benefit from confidential information. These executives try to avoid traditional restrictions on insider trading by buying shares of financially linked companies, a phenomenon called “shadow trading.”

“There appears to be significant gains being made from parallel trading,” said Mihir N. Mehta, assistant professor of accounting at the University of Michigan and author of a 2021 study in The Accounting Review that found “strong evidence” of the behavior. “People who do it have a sense of entitlement or maybe they just think, 'I'm invincible.'”

Another recent insider trading case in the Bay Area shows how shadow trading works. Matthew Panuwat, an executive at San Francisco biopharmaceutical company Medivation, was informed in August 2016 that Pfizer was acquiring his company. Minutes later, he bought shares in a third pharmaceutical company. When the Medivation deal was announced, the third company became an interesting prospect and its stock soared as well. Mr. Panuwat's earnings: $107,066.

At his trial this spring, Panuwat said the timing was a coincidence. A jury didn't buy it and, after only brief deliberation, on April 5 found him guilty of insider trading.

White-collar defense firms anticipate an explosion of new cases. “The successful prosecution of Mr. Panuwat has armed the federal government with a powerful new precedent,” said Gibson Dunn, a San Francisco litigator. he told customers.

The SEC issued a short statement After Mr. Panuwat's verdict, he said there was “nothing new” in the case: “This was insider trading, pure and simple.” A lawyer for Panuwat did not respond to a request for comment.

The agency also considers Mr. Bechtolsheim's case to be straightforward, although he had a higher profile than usual. He was one of the few cases of wealthy company founders charged since 2001, when lifestyle guru Martha Stewart It was suggested that he sell his shares in a medical company before it announced bad news. Ms. Stewart was sentenced to five months in jail for obstruction of justice.

Mr. Bechtolsheim grew up in rural West Germany and from an early age developed an interest in how things worked. “I spent all my free time just building things,” he once said.

He went to Stanford to get a Ph.D. He was a student in the mid-1970s and was introduced to the university's then-small programming community. In the early 1980s, he, along with McNealy, Vinod Khosla, and Bill Joy, founded Sun Microsystems as an outgrowth of a Stanford project. When Sun initially raised money, Bechtolsheim invested his life savings (about $100,000) into the company.

“You could end up losing all your money,” the venture capitalists funding Sun warned him. His response: “I see zero risk here.”

Asked in a 2015 oral history What was his social life like during Sun's early years, Mr. Bechtolsheim responded: “Social life? He didn't have any social life. He worked day and night designing new workstations and building the company. “That was the only thing that mattered to me at that moment.”

The bet paid off. Sun workstations occupied a niche between the rudimentary personal computers of the era and the high-end mainframes from IBM and others. Sun later expanded into computers that manage other computers called servers. At its peak, the late 1990s dot-com bubble, Sun had a stock market valuation of $200 billion.

It was Bechtolsheim's funding of Google in 1998 that made it a permanent part of Silicon Valley lore. The deal came at a time when Google founders Sergey Brin and Larry Page weren't even sure they wanted to build a company around their home search technology. They were focused on earning their PhDs at Stanford.

The reversal happened like this, according to Steven Levy's 2011 Google story, “In the Plex”: Mr. Brin emailed Mr. Bechtolsheim one afternoon, around midnight. Mr. Bechtolsheim responded immediately, suggesting a meeting the next morning.

An impromptu demonstration was hastily organized for eight in the morning, which Mr. Bechtolsheim interrupted. He had seen enough and he also had to get to the office. He gave them a check and the deal was sealed, Levy wrote, “with as little fanfare as if he were grabbing a latte on the way to work.” The founders celebrated at Burger King.

Page and Brin couldn't deposit Bechtolsheim's check for a month because Google didn't have a bank account. When Google went public in 2004, that $100,000 investment was worth at least $1 billion.

However, it was not money that made the story famous. It was his way of confirming one of Silicon Valley's most cherished beliefs about himself: that his genius is so blindingly obvious that questions are superfluous.

The dot-com boom was a disorienting period for former Valley leaders whose interest in money was muted. Mr. Joy, Mr. Bechtolsheim's colleague at Sun, left Silicon Valley.

“There's so much money out there that it's clouding a lot of people's ethics,” Joy said in an oral history from 1999 with Mr. Bechtolsheim.

Mr. Bechtolsheim did not leave. In 2008, he co-founded Arista, a Silicon Valley computer networking company that it became public and now has 4,000 employees and a stock market value of $100 billion.

Bechtolsheim was chairman of Arista's board of directors when an executive from another company called him in 2019, according to the SEC. Arista and the other company, which was not named in court documents, had a history of sharing confidential information under non-disclosure agreements.

This executive told Mr. Bechtolsheim that a smaller networking company, Acacia, was in play, according to the SEC. The executive's company had been considering acquiring Acacia, but now another company was making an offer. To do?

Whatever advice Mr. Bechtolsheim provided was not mentioned in the SEC complaint. But immediately after hanging up, according to the government, he purchased Acacia options contracts in the accounts of a close relative and a colleague. The next day the agreement was announced. Acacia shares rose 35 percent.

Arista's code of conduct states that “employees in possession of material, non-public information obtained through their work at Arista may not trade in Arista securities or securities of another company to which the information pertains.”

Levy, the author of “In the Plex,” said there were many legal ways to make money in Silicon Valley. “Someone who is considered an influential funder and is very well connected gets almost unlimited opportunities to make highly desirable early investments,” he said.

Bechtolsheim is no longer chairman of Arista's board of directors, but has the title of “chief architect.” Arista issued a statement saying he will “respond appropriately to the situation,” but declined to say what that meant.

McNealy, Sun's former chief executive, said he did not know the details but that Bechtolsheim's overall career should be taken into account.

“While Andy may have made a mistake knowingly or accidentally,” he said, “he will always be able to say he did a great job.”


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