Information obtained by hacking, rather than a personal tip-off, does not breach SEC laws on insider trading

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Ukrainian hacker may get to keep profits

Legal loophole could mean $296,456 payday

Iain Thomson, vnunet.com 18 Feb 2008

A Ukrainian hacker may be allowed to keep over $250,000 in profits owing to a loophole in US law.

Oleksandr Dorozhko is alleged to have hacked into the servers of Thomson Financial and taken a look at the forthcoming results announcement for IMS Health, hours before its release to the stock market.

Dorozhko placed a series of sell orders on the stock, investing $41,671 of his own money in sell options that would be worthless in three days unless the stock fell.

When the results, which were disappointing, were released the stock fell sharply and Dorozhko made $296,456 on the trade.

The deal set off warning bells on the US Securities and Exchange Commission (SEC) computer systems that watch for insider trading, and the brokerage account containing the funds was frozen.

But because the stock information was obtained by hacking, rather than a personal tip-off, a judge has ruled that there is no legal way to deny the money to Dorozhko.
"Dorozhko's alleged 'stealing and trading' or 'hacking and trading' does not amount to a violation of securities laws," US District Judge Naomi Reice Buchwald ruled last month, according to The New York Times.

"Dorozhko did not breach any fiduciary or similar duty 'in connection with' the purchase or sale of a security."

While the judge acknowledged the absurdity of the situation she said that the only way to proceed was for a hacking prosecution against Dorozhko.

But the US Department of Justice has already refused to do this on the ground that obtaining a prosecution in the Ukraine would be too difficult.

The SEC still maintains that the information was obtained by deception, but from a computer system and not a human being.

Dorozhko's lawyer is fighting this assertion, however. "They want you to believe that there is a deception of a computer," he said. "All there is is a high-tech lock pick."

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