Hacker Could Keep Money from Insider Trading 152
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."
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:why buy shares unless you know something ... (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 might as well buy a lottery ticket.
In many cases, you have it correct - With two (obvious) exceptions.
First, the market as a whole tends to go up or down for long periods at a time. If, in a bull market, you buy something reasonably big and safe (or better, ETFs covering the most bullish segments), your investment will tend to grow; If, in a recession, you short the same (and again, ETFs exist that will let you do that without the hassle and risk of actually holding a short position), you will make money, on average.
Second, unlike a lottery ticket, playing the market very rarely counts as an all-or-nothing bet. You may lose money on a given trade, but with some care (and the magic of trailing stops) you can limit your losses while allowing your gains to grow unbounded - Kinda like a $1 lottery ticket with a minimum payment of $0.95.
If not for those two facts, your 401k would also amount to nothing more than a lottery ticket - Though since July, some people might have started considering it just that.
Re:Buying high, selling low, making money how? (Score:2, Informative)
Re:Buying high, selling low, making money how? (Score:3, Informative)
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 securities 101.
Re:Buying high, selling low, making money how? (Score:2, Informative)
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.
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.
Re:Profits, yes, however: (Score:1, Informative)