Thursday, July 23, 2009

Ukrainian Hacker Can Be Sued for Fraud Under Securities Exchange Act, Says 2nd Circuit

A New York Law Journal article by Mark Hamblett, via, reports that:

A man who hacked into a computer network to gain advance information about a company's financial reports can be sued for fraud under the Securities Exchange Act of 1934 even though he owed no fiduciary duty to the company, the 2nd U.S. Circuit Court of Appeals has ruled.

The circuit said there is nothing in the case law that "expressly imposes a fiduciary-duty requirement on the ordinary meaning of 'deceptive' where the alleged fraud is an affirmative misrepresentation rather than a nondisclosure."

The ruling in Securities and Exchange Commission v. Dorozhko [.pdf], 08-0201-cv, reversed a decision by Southern District Judge Naomi Reice Buchwald refusing to grant a preliminary injunction to the SEC that would freeze the alleged hacker's trading gains.

Buchwald had found that computer hacking cannot be considered "deceptive" unless there is a breach of fiduciary duty.

The appeal was decided by Judges Jose A. Cabranes and Peter W. Hall and, sitting by designation, Southern District Judge Richard J. Sullivan.

Ukranian national Oleksandt Dorozhko invested $42,500 through his online trading account in October 2007 and spent almost all of it on "put" options in IMS Health, Inc., betting the company's quarterly earnings would disappoint and the stock price would drop.

IMS Health Inc., which had hired Thomson Financial Inc. to provide investor relations and Web-hosting services, was set to announce earnings on Oct. 17, 2007, at 5 p.m.

The SEC alleges that Dorozhko made $286,456 on the put options when the company's earnings came in below the expectations set by Wall Street analysts. They also allege he was the one who hacked into Thomas Financial's secure server and downloaded critical information about IMS Health in advance of the earnings call.

More here.


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