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."

Comments

That opens the doors

[Alain Williams]

Suppose I work for large corporate X, I know that the shares will move, so I tell my mate how to crack a machine to find something to support that view, he does so & invests appropriately and if caught just says he hacked a machine.

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!

Re:That opens the doors

[debrain]

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 Negatory - the ruling is that if you do not have insider information and hack into it, you are not in breach of any fiduciary duty, and therefore not subject to the penalties that insider traders are (whom are an especially heinous group of people, and whom we particularly want to deter by excess punishment).

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.

Re:That opens the doors

[Anonymous Coward]

Though the cracker may be able to keep his profits, it may not be for long, depending on what other laws apply. A law may apply that prevents profiting as a result of criminal activity. He is still likely to be charged and found guilty of crimes that won't allow him to keep the money.

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.

Re:Buying high, selling low, making money how?

[blasterz]

He didn't buy stock, he bought put options and exercised them.

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.