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Hacker Could Keep Money from Insider Trading
Posted by
Soulskill
on Sun Feb 17, 2008 08:22 AM
from the finders-keepers dept.
from the finders-keepers dept.
Reservoir Hill brings us a New York Times story about a man who will be allowed to keep the money he gained through hacking into a computer system in order to gain early access to a company's earnings statement. From the Times:
"On Oct. 17, 2007, someone hacked into a computer system that had information on an earnings announcement to be made by IMS Health a few hours later. Minutes after the breach of computer security, Mr. Dorozhko invested $41,671 in put options that would expire worthless three days later unless IMS shares plunged before that. The next morning the share price did plunge, and Mr. Dorozhko made his money by selling the puts. 'Dorozhko's alleged "stealing and trading" or "hacking and trading" does not amount to a violation' of securities laws, Judge Naomi Reice Buchwald of United States District Court ruled last month. Although he may have broken laws by stealing the information, the judge concluded, 'Dorozhko did not breach any fiduciary or similar duty "in connection with" the purchase or sale of a security.' She ordered the S.E.C. to let him have his profits."
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Fair enough (Score:4, Interesting)
Troll? (Score:5, Insightful)
Will whoever modded the parent a troll please share his or her logic? I will admit that it is not brilliant, so offtopic, maybe, overrated, maybe, but troll? That's just an insult. Personally, I am happy to see a first post that is not an AC "fp bitches!" and I think the effort should be rewarded.
I meta moderate about every other day, and I almost always rate the troll mods as "unfair". I don't know if this has any effect, but just so you know.
Parent
Re: (Score:2, Redundant)
Re:Troll? (Score:5, Insightful)
"Will whoever modded the parent a troll please share his or her logic?"
I did not/would not have modded him troll, but I can guess the simple logic at doing so.
He appears to have the all-too-common opinion that there is no such thing as a profitable but risky opportunity. I teach intro probability and decision making (among other things), and you would not believe how many people reason that, if there is uncertainty, it's "impossible" to make a good decision. The reasoning is "Well, since something bad might happen, you might end up regretting your decision." Ugh. Those are people for whom "probability", "expected value", etc., will forever remain magical, abstract terms with no application in the real world.
Before my rant goes too far off topic, back to the GP, who said:
"It is stock market after all, nobody can guarantee the outcome even with insider news."
So insider information should be ok?! After all, "there are no guarantees"?! Nonsense! And I can imagine there being at least a few mods who would consider it so obvious that this is nonsense, that they modded him troll, thinking there could be no other excuse.
Now I'm the one wondering how he got so many insightful mods!
Parent
Re:Troll? (Score:4, Informative)
The point being that, while he clearly had solid and profitable information, he obtained it in a way that, theoretically, any outsider could have and that did not fit the definition of insider trading as currently used. He also couldn't have known if, perhaps, he had accidentally found an inaccurate draft report or if the press conference wherein the report was to be released would be delayed.
Parent
Re:Fair enough (Score:5, Funny)
"I don't understand the stock market at all. We get a good FDA report and a promising drug is released, and the stock goes down. We kill 10 people and the stock goes up. Who the fuck knows?"
Parent
That opens the doors (Score:5, Insightful)
If he were to say that I told him, them we would have the book thrown at us ... but if he cracks a machine then all is OK
Stupid!
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Anyway - see this as a lesson to either release your information fast enough to avoid anyone to take advantage or to improve the security of your data. Preferably both.
The catch with inside affairs is that at some point "knowledge" becomes "rumor" and it couldn't be certain that the data he
Re:That opens the doors (Score:5, Insightful)
If a mate hacks a machine based on insider information, both the informant and the hacker are breaching a fiduciary duty. They're more likely to get useful information, and more likely to cause serious harm to the financial system. In my opinion, we want to deter hacking based on insider information more than random hacking.
That's not to say the fellow should get to keep the money. That will only serve to encourage random hacking pointedly in the absence of (traceable) insider information. However, trading on insider information should result in more significant consequences.
Parent
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Are there any lawyers in the audience
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Tell that argumentative Won guy that one who breaks into a system is pretty much de facto not trusted. :-)
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Re:That opens the doors (Score:5, Insightful)
Parent
Re:That opens the doors (Score:5, Interesting)
Parent
Seems reasonable to me (Score:5, Informative)
The judge's ruling seems pretty reasonable to me. What the hacker did was not insider trading, because he was not an insider, so the various regulations governming insider trading should have been found not to apply here.
Of course, as the judge also noted, that doesn't mean he broke any other laws. A fine equal to the profit he made on the options plus the original cost of buying them in the first place plus the cost of security work to ensure the systems are no longer vulnerable, combined with a jail sentence equal to what would have been handed down to an insider who made the same deal, seem like a fair punishment for the hacking to me.
Re:Seems reasonable to me (Score:4, Interesting)
I guess a good analogy would if you broke into someones home to read their wallstreet journal and then used their phone to make a call to your broker to make a trade.
Calling a broker to make the trade isn't the sticking point, but rather you broke into someone's home.
Parent
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Can anyone explain why this wasn't the case?
Re:Seems reasonable to me (Score:5, Insightful)
You said it yourself, as highlighted above.
Parent
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Not sure... go ask a lawyer.
Re:Seems reasonable to me (Score:5, Insightful)
Parent
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Shortly after that (Score:2, Funny)
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I got it! I got it! Neuromancer, William Gibson, 1984!
Where's my prize?
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Well slow down here (Score:5, Interesting)
However, he still could lose them. If the government tries and convicts him of a crime for actually hacking in to the system, then the money can be taken. You aren't allowed to profit from crimes, and as such the government can seize assets you gained through crime. So, if they manage to convict him of breaking in to the systems, the money he made in the trades will be fair game since it was a result of the break in.
However at this time he's not been charged, so that isn't on the table yet. However that doesn't mean this ruling says you get to keep your money no matter what in a case like this. It just means that it doesn't quality as insider trading so the SEC can't take it.
A similar case would be something like robbing a bank and then using the money to make more in the stock market. Even though the money was stolen, it isn't a violation of securities laws, so the SEC couldn't take it from you. However if you get convicted of robbery, the court could then seize the profits you got from that crime.
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why buy shares unless you know something ... (Score:2, Interesting)
Seriously, all share trading works on the basis of one party thinking they know something that either makes a stock worth selling or worth buying. When they are right they make a profit and when wrong they make a loss.
If you don't have any privileged (either by insider or through your own analysis) information, you're effectively just making a bet - you might as well buy a lottery ticket.
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You do not have to be different or have different knowledge from others. Buying GOOG stock early or investing in stocks that pay good dividends are examples of decisions that are made based on public info- there is plenty of money that can be made using normal, publicly available information. Investing in penny stocks and day-trading are completely different issues of course.
Re: (Score:3, Informative)
Well, dividend-paying stocks give you a regular return - As long as you feel fairly confident that the company won't go under, you'll make a hell of a lot more than you would leaving the money in your savings account (and if you chose well and occasionally reallocate your portfolio, without requiring otherwise-unknown data, you can do a good bit better than a CD or even investment-grade bonds.
you're effectively just making a bet - you mig
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It's slightly OT but by mentioning the ability to "short" via ETFs, you should also point out to /. readers that these ETFs do not necessarily give you the equivalent of a short position, especially the "ultra-short" ETFs. For instance, SDS (Proshares Ultrashort S&P 500) gained 2.49% this past month versus a 1.69% loss
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It's a risk/reward thing. You could put it in a savings account or a U.S. Government Bond with near-absolute safety (you will never lose anything) and get, say 3%. Or, you can boost your expected return over time by taking on some risk. With rational investments, the more risk you take, the greater the expected return over time.
Hack'n'Trade (Score:2)
Reminds me about a Swedish group called Hack'n'Trade...
I think they meant some other kind of trading though.
Buying high, selling low, making money how? (Score:2)
"Mr. Dorozhko invested $41,671 in put options that would expire worthless three days later unless IMS shares plunged before that. The next morning the share price did plunge, and Mr. Dorozhko made his money by selling the puts."
I don't understand this. He was buying, waiting for the share price to plunge, and then selling. Doesn't that mean he was selling lower than he bought? How did he make money?
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He was not buying the shares, he way buying put options, which basically give you the right to sell ("put") the shares at a predetermined price. If the share price suddenly drops, you can make money by just buying the shares on the open market and exercising your put options (which give you a fixed selling price that is now higher than what you're paying for the shares on the stock market). Alternatively, you can just sell the options themselves, which is less of a hassle.
Welcome to securitie
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He only loses the money he paid for the contract. In this case he'll just let the option expire and not exercise it. This is an OPTION, so he's not obligated to sell for $90.
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He
Re:Buying high, selling low, making money how? (Score:5, Informative)
Here's how they work, more or less:
Stock A is currently selling for $100 per share. A trader a couple of months ago felt confident that the stock would never drop below $80 per share, so he sold put options - guarantees that he would buy the stock from you at a given price - in this case $80 - for a given date. If the price of the stock remains at $100/share, the options will be worthless, because owning shares valued at $100 there's no way I will sell them for $80. However, if the stock price drops to $60, I'd be more than happy to sell for $80/share. The person selling the options has no choice - if I come to him with the contract, he has to buy them at $80/share.
Those options can be traded up to the exercise date. So I buy them three days before the exercise date at a low price, as no one expects the stock to drop that much - the options themselves are worthless. I know the stock will plummet; I buy up all the options I can afford - let's say a buck a pop. Stock price is $60, suddenly those options are worth $20 apiece - difference between the market price and what the trader is obligated to pay.
Parent
I'm inclined to say (Score:5, Insightful)
That this is actually quite appropriate. Since he didn't have any fiduciary duty, the SEC shouldn't take his money away. That said, since it's profit from an illegal act, I would hope that the money would be taken away -- if and when he is convicted for the crime of stealing the data.
Too often in this country we seem to be throwing every law available at people and making up new ones to go with them, when the acts we're trying to punish are already illegal. If he didn't break securities laws, he shouldn't be punished under them. Since he did (we assume, but it hasn't yet been proven) break unauthorized access laws, he should be punished under those.
We don't need more laws against things that are already illegal, and we don't need to make a mockery of existing laws by applying them to things they don't apply to. On a related note, why do we need separate "identity theft" and "atm card fraud" laws, when anyone being charged with them is already also being charged with uttering false instruments and fraud? Our legal code needs to be smaller and simpler; making it so would make it more effective and efficient, not less.
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Now we know what that third step is... (Score:2)
2. Get the necessary information...
3. goto court and...
4. Profit.
like most answers, it's been right under our noses all along, I guess that goto's are not so bad after all :-)
Profits, yes, however: (Score:3, Interesting)
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Yes, the prosecutors messed up. They charged him with insider trading, which has a very specific definition under the law [sec.gov]. In this case the guy doesn't meet any of the requirements to be an insider under the rules. What got him off is probably that he had no help from anyone who was an insider. That's actually a deliberate "loophole" in the law so that, for example, if the CFO is dumb and leaves a copy of his company's next quarterly report on the table at a restaurant a week before it's due to be published