1. Home
2. Daily News
3. 2nd Circuit Weighs Whether Hacking and Trading…

2nd Circuit Weighs Whether Hacking and Trading is a Securities Violation

By Debra Cassens Weiss

February 15, 2008, 4:11 pm CST

An anomaly in securities law could allow a Ukrainian resident who allegedly gained inside corporate information by hacking into a computer to keep the nearly $300,000 he made by trading on what he learned.

The Securities and Exchange Commission has asked (PDF posted by the New York Times) the 2nd U.S. Circuit Court of Appeals to issue an emergency order freezing the one-day options profits of $296,000 earned by Oleksandr Dorozhko, Floyd Norris writes in his High and Low Finance column for the New York Times.

Securities laws bar traders from profiting on inside information that is obtained legally, but it may not bar information obtained through a simple theft such as hacking, Norris says. At issue is Rule 10(b), which bars the use of “a deceptive device or contrivance” in connection with stock sales.

The SEC argues that hacking involves deception, a view that Dorozhko’s lawyer, Charles Ross, does not share. “They want you to believe there is a deception of a computer,” Ross said. “All there is is a high-tech lock pick.”

A federal judge ruled last month in the case (PDF posted by the New York Times) that hacking and trading is not a violation of securities law. The judge said there was no breach of a fiduciary duty as required by the case law.