Hacker Could Keep Money from Insider Trading

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."

Fair enough

[biocute]

It is stock market after all, nobody can guarantee the outcome even with insider news. What if the company suddenly decided to delay the announcement?

Well slow down here

[Sycraft-fu]

He *may* get to keep it. Basically what has happened is that the courts have ruled that the SEC can't take away his money, because what he did isn't insider trading. Remember that the SEC just regulates stock trading. So since this isn't insider trading, they don't have the authority to seize his funds.

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.

why buy shares unless you know something ...

[petes_PoV]

... that others don't?

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.

Re:Seems reasonable to me

[vertinox]

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.

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.

Re:Well slow down here

[Jah-Wren Ryel]

exactly, although if they had a case against him for hacking, it would seem they would have used that already as a slam-dunk case.

I would really like to hear the details of "hack" - sounds like it might have been one of those where he just twiddled the URL based on the format of already "public" URLs. IMO, that should not count as illegal hacking, its so trivial, obvious and common practice.

He's no more crooked than what goes on every day.

[stratjakt]

My company was publically traded for two years, and was recently bought by a large multi-national. Somehow, magically, mysteriously, the week before the announcement of the buyout offer was made, our stock jumped 2.50 out of nowhere, which is pretty big for a 5 dollar stock.

I asked the CFO about it at the company meeting, in front of a sea of shocked faces, and smirked at his "uhh some guys were shorting the stock its a coinkydink" answer.

Why regular folks would even invest is beyond me. The whole stupid fucking system is rigged to take from the poor, and give to the rich.

Re:I'm inclined to say

[kpansky]

The more corrupt the republic, the more numerous the laws. ~Tacitus, Annals

Re:That opens the doors

[ucblockhead]

If you told him to crack the machine, then *that* is insider knowledge.

Profits, yes, however:

[Duncan Blackthorne]

So a judge let him have his ill-gotten gains. He still broke into computer systems to gain the information he used in this exploit. What's to stop a criminal judge from prosecuting him for that, sending him to jail, and fining him all the profits he made on this plus what he invested in the first place plus some on top of that to drive the point home?

By definition, you are an insider if you have...

[mexicanpizza]

...any "material, non-public information".

As soon as he has the info, he cannot trade on it as he is an insider. Simple.

The judge is an idiot.

Re:Fruit of a poisoned tree?

[Todd Knarr]

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, the regular joe who picks it up, notices that the company's earnings have tanked and sells his stock before the rest of the market finds out can't be prosecuted as an insider (unless the regulators can prove some collusion between him and the CFO).

Of course, that aside, the guy's breaking into the computers is a crime, and he can and should be prosecuted for that. But if the prosecutors charged him with something he didn't do, then the charges should properly be thrown out.

And yes, the legal system should be picky about definitions like that. It serves nobody's interests for the courts to begin going "Well, you didn't actually do what you were charged with. But that's OK, since you did something else illegal we'll convict you of what you didn't do anyway.".