Monday, March 3, 2008

Can Information From Hacking Be The Basis Of A Securities Violation?

The second circuit has a fascinating securities case that has old laws meeting new technology. And the question will be whether the text of the statute ought to be stretched beyond its language to reach new forms of criminality -although in this particular case the criminality is merely alleged. (See Floyd Norris NYTimes story here)  Or is the legislature the more appropriate place to reform the law?

Basically, a Ukrainian trader allegedly hacked into a financial database and finding a forthcoming negative report, it is argued that he traded on the inside information.  The problem is that no fiduciary relationship exists to find that this conduct constitutes a section 10(b) violation. The district court judge in the Southern District of New York found no violation and the case proceeded to the Second Circuit with the government arguing otherwise.  Hon. Naomi Reice Buchwald, writing the thoughtful district court opinion, states in part:

"...the barrier to issuing a preliminary injunction at this stage in the proceedings is that the alleged 'hacking and trading' -- while illegal under any number of federal and/or state criminal statutes -- does not amount to a violation of section 10(b) of the Exchange Act under existing case law.   For as the SEC even acknowledges, in the 74 years since Congress passed the Exchange Act, no federal court has ever held that that the theft of material non-public information by a corporate outsider and subsequent trading on that information violates section 10(b)."

In the meantime, the SEC is trying to have the Second Circuit continue to freeze the trading account proceeds while the appeal is pending.  Representing the accused here is Charles A. Ross. The decision and arguments can be found accompanying the NYTimes story here.


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I know of a situation recently where a guy plead guilty to securities fraud for secretly copying the trades of a trader that had inside information. Sounds similiar.

Posted by: DAG | Mar 4, 2008 3:10:54 PM

Can hacking your wifes myspace account be criminal? he hacked into a database, isn't that criminal?

Posted by: Hacking MySpace | Jun 11, 2008 4:38:43 PM

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