Andreas Bechtolsheim doesn't like to waste time. This entrepreneur made one of his most famous investments in Silicon Valley history, namely his first $100,000 in 1998 to fund a search engine called Google. I did it one morning on my way to work. It only took a few minutes.
Twenty-one years later, Mr. Bechtolsheim may have seized a different kind of opportunity. According to a complaint filed by the Securities and Exchange Commission, he is suspected of trading on confidential information after receiving a call about an impending sale of a high-tech company. Profit from a few minutes of work: $415,726.
The history of Silicon Valley is full of high stakes and sudden falls, but few have traded his reputation for so little pay. For Mr. Bechtolsheim, $415,726 was the equivalent of a quarter on the back of the couch. Last week, he was ranked 124th on the Bloomberg Rich List, with his estimated wealth at $16 billion.
Bechtolsheim, 68, settled insider trading charges last month without admitting wrongdoing. He paid a fine of more than $900,000 and agreed not to serve as an officer or director of a publicly traded company for five years.
There doesn't seem to be anything in his background that led him to this point of trouble. Mr. Bechtolsheim is one of the people who gave Silicon Valley its reputation as an engineer's paradise, where getting rich happens by chance.
“He was very interested in creating great technology,” said Scott McNeely, who co-founded Sun Microsystems, a maker of computer workstations and computer workstations, with Bechtolsheim 40 years ago. So when I bought the house, I didn't want to furnish it with furniture and planned to sleep on futons.'' Servers have been a technology powerhouse for years. “He didn't measure himself by money.”
Bechtolsheim was not trading on his own behalf, according to the SEC's complaint. Instead, he used the accounts of his colleagues and relatives. Perhaps this was a trick, or maybe it was a gift. Investors and lawyers did not respond to email requests for comment.
Former SEC enforcement officer Michael D. Mann said insider trading is typically a “crime of passion.” “This is based on information that has value only in a very short period of time. The moment you get it, greed takes over and you go out and trade it. Is it really worth it?'
Buying options on a company just before a merger is announced is a red flag for regulators and is relatively easy for regulators to detect. It would seem less risky to trade in someone else's account, as Bechtolsheim is accused of, or in a company that is not directly involved in the trade but is likely to benefit from it. .
Because insider trading prosecutions are relatively rare, it's difficult to determine exactly what's really going on in home offices, executive suites, and office parks. But researchers who analyze transaction data say business executives widely profit from confidential information. These executives seek to circumvent traditional insider trading regulations by buying stock in companies with which they have financial ties, a phenomenon known as “shadow trading.”
“It appears that a lot of money is being made from shadow trading,” said Mihir N. Mehta. Mihir N. Mehta is an assistant professor of accounting at the University of Michigan and author of a 2021 research paper in Accounting Review that found “robust evidence” of this practice. . “Maybe the people who are doing this have a sense of entitlement, or maybe they just think they're invincible.”
Another recent case of Bay Area insider trading illustrates how shadow trading works. Matthew Panuwat, an executive at biopharmaceutical company Medivation in San Francisco, was informed in August 2016 that Pfizer was acquiring his company. A few minutes later, he bought stock in a third drug company. When the acquisition of Medivation was announced, the third company gained attention and its stock price soared. Mr. Panuwat's profit: $107,066.
At his trial this spring, Panuwat said the timing was fortuitous. The jury disagreed, and after a brief deliberation on April 5, found him guilty of insider trading.
White-collar defense companies are predicting a sharp rise in the number of new infections. “The successful prosecution of Mr. Panuwat provides the federal government with a powerful new precedent,” law firm Gibson Dunn told clients.
After Panuwat's verdict, the SEC issued a short statement saying there was “nothing new” about the case and that “this was insider trading, pure and simple.” Mr. Panuwat's lawyer did not respond to a request for comment.
Authorities also consider Bechtolsheim's case to be a simple one, although it received more attention than usual. This is the first time a wealthy company founder has been charged since 2001, when lifestyle guru Martha Stewart was tipped off to sell her stake in her medical company before announcing bad news. This was one of the few incidents. Stewart was sentenced to five months in prison for obstruction of justice.
Bechtolsheim grew up in rural West Germany and became interested in how things worked from an early age. “All my free time was spent making things,” he once said.
He went to Stanford University for his Ph.D. He became acquainted with the community in the mid-1970s, when he was active as a student and programming around the university, which was then small. In the early 1980s, he, along with McNeely, Vinod Khosla, and Bill Joy, founded Sun Microsystems, an outgrowth of the Stanford project. When Sun first raised money, Mr. Bechtolsheim put all of his life savings, about $100,000, into the company.
Venture capitalists funding Sun warned that it could end up losing all its money. His answer: “I think there's zero risk here.”
Asked in a 2015 oral history what Sun's early social life was like, Bechtolsheim replied: I had no social life. I was working day and night designing a new workstation and building a company. That was all that mattered to me at the time. ”
The gamble paid off. Sun's workstations filled the gap between the rudimentary personal computers of the time and high-end mainframes such as IBM's. Later, Sun expanded into computers that managed other computers, called servers. At the peak of the dot-com bubble in the late 1990s, Sun's stock market valuation was his $200 billion.
It was Bechtolsheim's funding of Google in 1998 that cemented him into Silicon Valley lore. The partnership comes at a time when Google founders Sergey Brin and Larry Page weren't even sure whether to build a company around their homegrown search technology. They were focused on earning their Ph.D.s at Stanford University.
According to Steven Levy's 2011 history of Google, “In the Plex,” the investment was made as follows: Mr. Brin emailed Mr. Bechtolsheim around midnight one night. Bechtolsheim quickly replied and suggested a meeting the next morning.
An impromptu demonstration was hastily scheduled for 8 a.m., but Bechtolsheim called it off. He had seen enough, besides, he had to go to his office. He handed them a check, and the deal closed “with as little fanfare as if you were drinking a latte on the way to work,” Levy wrote. The founders celebrated at Burger King.
Because Google didn't have a bank account, Mr. Page and Mr. Brin were unable to deposit Mr. Bechtolsheim's checks for a month. When Google went public in 2004, his $100,000 investment was worth at least $1 billion.
But it wasn't the money that made this story famous. It confirmed one of Silicon Valley's most cherished beliefs about itself: that its genius is so blindingly obvious that it needs no questioning.
The dot-com boom was a disorienting time for Valley's longtime leaders, who were less interested in money. Bechtolsheim's Sun colleague Joy left Silicon Valley.
“There's so much money floating around that it's clouding the ethics of a lot of people,” Joy said in a 1999 oral history with Bechtolsheim.
Mr. Bechtolsheim did not leave. In 2008 he co-founded his Arista. Arista is a Silicon Valley computer networking company that currently has 4,000 employees and a stock market value of $100 billion.
The SEC said Arista and another company, not named in court documents, had a history of sharing confidential information under non-disclosure agreements.
The SEC said the executive told Bechtolsheim that Acacia, a small networking company, was involved. The executive's company had been considering buying Acacia for some time, but now another company is interested. what will you do?
Whatever attorney Mr. Bechtolsheim provided is not mentioned in the SEC's complaint. But shortly after he hung up the phone, the government said, he purchased Acacia options contracts on the accounts of his immediate family and colleagues. The contract was announced the next day. Acacia stock rose 35%.
Arista's Code of Conduct states, “Employees who are in possession of material non-public information obtained through their work for Arista shall not trade Arista securities or the securities of other companies to which that information relates.” Masu.
Levy, author of “In the Plex,” said there are many ways to make money legally in Silicon Valley. “Those who are considered influential funders and have very strong connections have almost unlimited opportunities to make highly desirable initial investments,” he said.
Mr. Bechtolsheim is no longer Chairman of the Arista Board of Directors, but holds the title of “Chief Architect.” Arista issued a statement saying it would “respond appropriately depending on the situation,” but declined to say what that meant.
Mr. McNeely, the former Sun chief executive, said he did not know the details but said Mr. Bechtolsheim's career as a whole should be considered.
“Andy may have made mistakes on purpose or by accident, but you can always say he did something really good,” he said.