Wednesday, June 9, 2010
Outsider Hacking and Insider Trading Under Section 10(b) of the Securities Exchange Act: The Impact of the Second Circuit's Decision in SEC v. Dorozhko, by James A. Jones II, University of Washington - School of Law, was recently posted on SSRN. Here is the abstract:
In January 2008, the Federal District Court for the Southern District of New York held that trading put options of a company’s stock based on inside information allegedly obtained by hacking into a computer network did not violate antifraud provisions of federal securities law. The court ruled that the defendant’s alleged “hacking and trading” did not amount to a violation of Section 10(b) and Rule 10b-5 because there was no proof the hacker breached a fiduciary duty in obtaining the information. The Second Circuit recently overturned the District Court’s decision, finding that a breach of fiduciary duty was not required for computer hacking to be “deceptive.” Having established that the Securities and Exchange Commission need not demonstrate a breach of fiduciary duty, the Second Circuit remanded the case to the District Court to determine whether the computer hacking in the case involved a fraudulent misrepresentation that was “deceptive” within the ordinary meaning of Section 10(b). This article evaluates the Second Circuit’s decision in SEC v. Dorozhko in light of the assumption that liability under the misappropriation theory requires a breach of fiduciary duty. This article also explores the implications of the Second Circuit’s decision and provides practice pointers to assist attorneys in advising their clients regarding the use of confidential information in connection with the purchase or sale of securities.