U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21465 / March 29, 2010
SECURITIES AND EXCHANGE COMMISSION v. Oleksandr Dorozhko, Civil Action No. 07 Civ. 9606 (NRB) (S.D.N.Y.) (filed October 29, 2007)
SEC OBTAINS SUMMARY JUDGMENT AGAINST COMPUTER HACKER FOR INSIDER TRADING
On March 24, 2010, the United States District Court for the Southern District of New York granted the Securities and Exchange Commission's motion for summary judgment against Oleksandr Dorozhko, a Ukrainian citizen who traded in the securities of IMS Health Incorporated based on information that he unlawfully obtained through computer hacking. The District Court, among other things, permanently enjoined Dorozhko from violating the antifraud provisions of the federal securities laws and ordered the defendant to pay approximately $580,000 in disgorgement, prejudgment interest, and a civil penalty.
On October 29, 2007, the Commission filed a Complaint alleging that just hours before the close of the market on October 17, 2007, Dorozhko, while in possession of material nonpublic information regarding the impending announcement of negative earnings by IMS Health, purchased 630 put options on the common stock of IMS Health. IMS Health planned to announce negative earnings via an investor relations service after the market closed on October 17. Earlier that day, Dorozhko secretly hacked into the investor relations firm's secure computer network and unlawfully accessed IMS Health's earnings information. Within minutes of this hack, and just before IMS Health's scheduled earnings release, Dorozhko embarked on an aggressive buying campaign and was able to purchase the IMS Health put options. After the market closed, IMS Health reported third quarter earnings that were significantly below analysts' consensus estimates and the previous year's third quarter earnings. The next day, IMS Health's stock price fell 28% to an all-time low, and Dorozhko sold all of his IMS Health put options and realized profits of approximately $287,346.
The Complaint alleges, among other things, that Dorozhko violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by using "fraudulent devices, schemes, or artifices, which may include, but are not limited to, hacking into computer networks or otherwise improperly obtaining electronic access to systems that contained information about IMS Health's imminent earnings announcement."
On January 7, 2008, the District Court denied the Commission's motion for a preliminary injunction and concluded that "Dorozhko's alleged 'stealing and trading' or 'hacking and trading' does not amount to a violation … because Dorozhko did not breach any fiduciary or similar duty 'in connection with' the purchase or sale of a security." SEC v. Dorozhko, 606 F. Supp. 2d 321, 324 (S.D.N.Y. 2008).
On appeal, the United States Court of Appeals for the Second Circuit reversed the District Court's decision holding "that nothing in the U.S. Supreme Court's jurisprudence or prior decisions of our Court expressly imposes a fiduciary-duty requirement on the ordinary meaning of 'deceptive' where the alleged fraud is an affirmative misrepresentation rather than a nondisclosure." SEC v. Dorozhko, 574 F.3d 42, 42 (2d Cir. 2009). The Second Circuit further held that "computer hacking may be 'deceptive' [even] where the hacker did not breach a fiduciary duty in fraudulently obtaining material, nonpublic information used in connection with the purchase or sale of securities" and that "misrepresenting one's identity in order to gain access to information that is otherwise off limits, and then stealing that information is plainly 'deceptive' within the ordinary meaning of the word." Id. at 43, 51. The Second Circuit remanded the case to the District Court, which granted the Commission's unopposed motion for summary judgment.
The Commission acknowledges the assistance of the Options Regulatory Surveillance Authority and the Chicago Board Options Exchange.
For further information, see Litigation Release No. 20349 (October 30, 2007).