UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission (the "SEC") for its complaint against Van T. Dinh ("Dinh") alleges as follows:
1. This civil action alleges numerous violations of the federal securities laws resulting from a skilled computer hacker's egregious use of the Internet to fraudulently access, and execute securities transactions in, another individual's online brokerage account in order to minimize his own imminent securities trading losses. Specifically, via the Internet and the use of various computer technologies, the Defendant Dinh orchestrated a scheme whereby he was able to surreptitiously usurp the on-line trading account of an unsuspecting individual and hijack its assets for his own illegal purposes. His unlawful scheme included extensive measures to conceal his identity and evade detection, including the use of numerous aliases, multiple e-mail addresses, and several online anonymizing tools and techniques.
JURISDICTION AND VENUE
2. The SEC brings this action, and this Court has jurisdiction over this action, pursuant to authority conferred by Sections 20(b), 20(d) and 22(a) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77t(b), 77t(a) and 77v(a); and Sections 21(d), 21(e) and 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78u(d), 77u(e) and 78aa.
3. This Court has personal jurisdiction over Defendant Dinh and venue is proper in the District of Massachusetts pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa] because many of the transactions, acts, practices, and courses of business constituting the violations alleged herein occurred within this District.
4. Dinh, directly and indirectly, has made use of the means and instrumentalities of interstate commerce, and the means and instruments of transportation and communication in interstate commerce, in connection with the transactions, acts, practices, and courses of business alleged in this Complaint.
5. Dinh, age 19, resides in Phoenixville, Pennsylvania. He has access to a computer and a high-speed Internet connection at his home and he maintains several Internet-accessible securities brokerage accounts.
DINH'S FRAUDULENT SCHEME
6. Between June 18 and June 27, 2003, Dinh used his CyberTrader online brokerage account to purchase a total of 9,120 put option contracts for the common stock of Cisco Systems, Inc. ("Cisco"), at a strike price of $15 per share and an expiration date of July 19, 2003 (the "July 15 puts"). A "put" is a futures contract that gives an individual the right to sell a specified amount of the shares of a company at a specified price and time. In this instance, each July 15 put gave Dinh the right to sell 100 shares of Cisco common stock at $15 per share until the put's expiration on July 19, 2003. Dinh paid $10 per contract, or approximately $91,200 in total, for all of the July 15 puts.
7. At the time of Dinh's purchases, Cisco's common stock traded publicly at prices ranging from $16.61 to $19.10 per share. Accordingly, during this period, Dinh's July 15 puts were "out of the money," meaning that they were not exercisable at a profit given that their $15 exercise price was below the current market value of the underlying security.
8. If Cisco's common stock fell to a price below the puts' $15 strike price, Dinh stood to make a substantial return on his investment. In fact, Dinh stood to receive approximately $9,120, before transaction costs, for every penny below $15 that Cisco common shares traded at the time Dinh elected to exercise his July 15 puts. In contrast, however, if Cisco common stock remained at prices above $15 per share, and if Dinh was otherwise unable to sell the July 15 puts within the options period, i.e. on or before July 19, 2003, they would expire worthless. If this happened, Dinh would be unable to recoup any of his $91,200 investment.
9. As the options' expiration date of July 19 approached, Cisco common shares continued to trade publicly at prices significantly above the options' $15 strike price. As a result, it was appearing more and more unlikely that Dinh would be able to exercise the July 15 puts at a profit, and instead increasingly likely that he would suffer a loss on his investment. For instance, on July 3, 2003, Cisco's common stock closed at $17.52 with an intraday high of $17.88. Similarly, on July 6, 2003, Cisco common stock closed at $18.22 with an intraday high of $18.25. Thus, by the close of business on July 6, 2003, the day before Dinh put his scheme into play, each of the July 15 puts was $3.22 "out of the money."
10. Given the above scenario, in order to avoid the loss of his entire investment prior to the date upon which the July 15 puts were likely to expire worthless, Dinh devised a scheme to ensure that he would be able to dispose of them in the marketplace. His scheme involved identifying an individual with an online brokerage account, unlawfully intruding into the home computer of that individual, and obtaining from that individual's home computer the password and login information associated with the online brokerage account. With this information, Dinh would be in a position to use that individual's account to purchase the July 15 puts.
11. To execute his scheme, Dinh targeted members of www.stockcharts.com, a website catering to avid securities traders. Among other things, www.stockcharts.com provides a forum where members can post analytical charts and commentary reflecting various trading strategies. Those who post charts can invite other members as well as visitors to the site to provide feedback via an e-mail-based web form.
12. On July 7, 2003, using the alias "Stanley Hirsch," Dinh completed several of these e-mail-based web forms. The "Stanley Hirsch" web forms that Dinh authored asked the various recipients whether they maintained their own websites and included an e-mail address to which responses could be sent. A copy of one of the e-mails generated as a result of a web form completed by "Stanley Hirsh" (with the recipient's e-mail address redacted) is attached hereto as Exhibit "A". Several members sent reply e-mails to the "Stanley Hirsch" inquiry, thereby revealing to Dinh their own e-mail addresses.
13. On July 8, 2003, Dinh, now posing as an individual named "Tony T. Riechert," sent another e-mail to the individuals who had responded to his previous "Stanley Hirsch" inquiry. This e-mail invited the recipients to participate in a so-called "beta test" of a new stock-charting tool. Those choosing to do so were directed, via e-mail, to a website that purportedly contained a downloadable version of the so-called "beta test" stock-charting tool. A copy of one of the July 8, 2003 e-mails (with the recipient's name and e-mail address, as well as the link to the website, redacted) is attached hereto as Exhibit "B".
14. In reality, the file purporting to be the "beta test" stock-charting tool was a disguised version of the "Beast," a keystroke-logging program that enables one computer user to remotely monitor the keystroke activity of another computer user.
15. The keystroke-logging program was designed to periodically send e-mails to Dinh reporting the keystroke activity of any individual who had downloaded the program.
16. At least one of the recipients of the "Tony T. Riechert" e-mail unsuspectingly downloaded the disguised keystroke-logging program and installed it on his home computer. This same individual, who is a resident of this District, maintained a TD Waterhouse brokerage account, which he periodically accessed, via the Internet, from this same home computer.
17. The keystroke-logging program enabled Dinh not only to identify this individual's TD Waterhouse account but also to ascertain the account's login and password information.
18. Several days later, on the morning of July 11, Cisco common stock was still trading steadily at prices above $18 per share. As a result, the July 15 puts were still more than $3 "out of the money." Nevertheless, Dinh accessed his own CyberTrader account and placed an order to sell 1,000 of the July 15 puts at a price of $5 per contract.
19. Not surprisingly, Dinh's sell order remained unexecuted for approximately 90 minutes. Given the fact that Cisco common stock was still trading well above the July 15 puts' $15 strike price, there was simply no demand in the marketplace for them at a price of $5 per contract.
20. Dinh was not deterred by the market's lack of interest in purchasing the July 15 puts. He merely turned to his scheme in order to create a market for the puts. Specifically, unbeknownst to the TD Waterhouse accountholder and without his authorization, Dinh accessed the accountholder's TD Waterhouse account and placed from it several buy orders for the July 15 puts at current market prices.
21. These buy orders were executed on the Chicago Board Options Exchange and were filled with the 1,000 July 15 puts from Dinh's CyberTrader account, resulting in pre-commission proceeds to Dinh of approximately $5,000.
22. During the hours that followed, Dinh placed a series of similar sell orders at $5 per contract in order to dispose of the remainder of his July 15 puts. Shortly after the placement of each sell order in his CyberTrader account, Dinh placed a corresponding buy order in the TD Waterhouse account.
23. In total, on July 11, buy orders from the TD Waterhouse account representing 7,200 July 15 puts were executed against sell orders from Dinh's CyberTrader account. As a result of these transactions, the TD Waterhouse account lost approximately $47,000, consisting of approximately $37,000 paid to Dinh for his options and almost $10,000 in commissions. This depleted virtually all of the cash in the unsuspecting individual's TD Waterhouse account.
24. Dinh's remaining sell orders, representing approximately 1,980 July 15 puts, remained unexecuted. There existed no buyer in the marketplace willing to purchase these options at a price of $5 per contract and there was insufficient cash in the unsuspecting individual's TD Waterhouse account to use for this purpose. Ultimately, these remaining July 15 puts expired worthless.
25. As a result of his illegal scheme, Dinh was able to avoid losses of approximately $37,000.
CLAIM FOR RELIEF
26. The SEC realleges and incorporates by reference the allegations set forth in Paragraphs 1 through 25 above.
27. By reason of the foregoing, Dinh directly and indirectly, knowingly or recklessly, by the use of the means or instruments of transportation or communication in, and the means or instrumentalities of, interstate commerce, or by the use of the mails, in connection with the offer, purchase or sale of securities, has: (a) employed devices, schemes or artifices to defraud; (b) obtained money or property by means of, or otherwise made untrue statements of material fact, or omitted to state material facts necessary to make the statements, in light of the circumstances under which they were made, not misleading; and/or (c) engaged in transactions, acts, practices, and courses of business that operated or would operate as a fraud or deceit upon purchasers of securities or other persons. As a result of his conduct, Dinh has violated and, unless restrained and enjoined, will continue to violate, Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] as well as Section 10(b) of the Exchange Act Section [17 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder.
PRAYER FOR RELIEF
WHEREFORE, the SEC respectfully requests that this Court enter a judgment that:
permanently restrains and enjoins Dinh, and his agents, servants, employees, attorneys, and all persons in active concert or participation with him who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder;
orders Dinh to disgorge all monies obtained through the illegal activities described above, plus prejudgment interest thereon, as well as to pay civil penalties pursuant to Section 20(d) of the Securities Act, and Section 21(d) of the Exchange Act; and
grants such other relief as this Court deems just and proper.
Dated: October 9, 2003