Wednesday, February 28, 2007

Hacking the News for Fun and Profit

The SEC brought an emergency action against a Hong Kong company, Blue Bottle Ltd., and its named owner, Matthew C. Stokes, for alleged insider trading.  The SEC's complaint (here) asserts that Stokes (or others) obtained advanced information about company announcements by hacking into computer networks to view press releases and other documents shortly before the information was released into the market.  They are accused of trading in advance of the information by buying or shorting the securities of twelve companies to take advantage of the effect of the news on the stock prices, reaping profits of approximately $2.7 million.  The trading took place in January and February 2007, and it appears that Stokes is only a front name on the account.  The SEC Litigation Release (here) describes the most lucrative trading before the release of negative earnings news:

[W]ith respect to the defendants' trading in Symantec, the complaint alleges that on January 12, 2007 at approximately 1:03 p.m. EST, the defendants began buying 10,000 SYMC Jan07 20 put contracts, which represented 20 percent of the total trading in that security for the day. Those contracts were out-of-the money when purchased. Later that same day, at approximately 1:37 p.m. EST, the defendants began buying 500 SYMC Jan07 22.5 put contracts, which represented 41 percent of the total trading in that security for the day. All of the put contracts were to expire on January 20, 2007. Essentially, buying the put options was a bet by the defendants that the price of Symantec stock would decrease. The Commission further alleges that on the next trading day, January 16, 2007, at 7:48 a.m. EST, Symantec issued a downward revision of its third quarter 2007 earnings and revenue forecast. Shortly following Symantec's announcement, the defendants began selling the put contracts, amassing a profit of $1,030,471.

Not a bad profit on an investment made for only a couple days, at most. From the SEC complaint, it appears that approximately $1.6 million is still in the U.S., while about $1 million has joined Elvis in leaving the building.  The Commission likely moved now to keep the money here, and will have to continue its investigation of the source of the well-timed trades through civil discovery.  This kind of trading is sure to draw the interest of the Department of Justice. The U.S. District Court for the Southern District of New York froze Blue Bottle's assets and ordered a hearing for March 7, although any individuals who might want to claim the money are unlikely to show up and risk an immediate arrest on criminal charges. (ph)

Civil Enforcement, Insider Trading, Securities | Permalink

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