April 23, 2019

April 23, 2019

Subscribe to Latest Legal News and Analysis

April 22, 2019

Subscribe to Latest Legal News and Analysis

SEC and New Jersey US Attorney’s Office Bring Parallel Charges in EDGAR Hacking Scheme

On January 15, the Securities and Exchange Commission announced charges against nine defendants, alleging their participation in a previously disclosed scheme to hack into the SEC’s EDGAR system and extract nonpublic information to use for illegal trading. The SEC charged a Ukrainian hacker, six individual traders in California, Ukraine and Russia, and two entities. In 2015, the SEC charged the hacker and some of the traders for their involvement in a similar scheme to hack into newswire services and trade on material nonpublic information 2015 Hack).

The complaint filed by the SEC alleges that the Ukrainian hacker implicated in the 2015 Hack, turned his attention to EDGAR following the 2015 Hack and, using deceptive hacking techniques, gained access in 2016. The hacker extracted EDGAR files containing nonpublic earnings results. He then communicated those nonpublic earning results to individuals who used the information to trade during the time period between when the files were extracted and when the companies released the information to the public. According to the complaint, the traders acted on the information before at least 157 earnings releases from May to October 2016 and generated at least $4.1 million in illegal profits.

Specifically, the complaint alleges that the hacker circumvented EDGAR controls that require user authentication and then navigated within the EDGAR system. According to the complaint, the hacker obtained nonpublic “test files,” which issuers can elect to submit in advance of making their official filings to help make sure EDGAR will process the filings properly. Issuers sometimes elected to include nonpublic information in test filings, such as actual quarterly earnings results not yet released to the public. The hacker extracted nonpublic test files from SEC servers, and then passed the information to different groups of traders.

The complaint charges each of the defendants with violating antifraud provisions of the federal securities laws and related SEC antifraud rules. The SEC is seeking a final judgment ordering the defendants to pay penalties, return their ill-gotten gains with prejudgment interest, and enjoining them from committing future violations of the antifraud laws. The SEC also named and is seeking relief from four relief defendants who profited from the scheme when defendants used the relief defendants’ brokerage accounts to place illicit trades.

The US Attorney’s Office for the District of New Jersey announced related criminal charges in connection with the SEC action.

In its announcement, the SEC emphasized the prevalence of risk posed to organizations, like itself, possessing valuable information and added that the SEC is committed to, and capable of, unraveling schemes of this sort and identifying their perpetrators.

Both the SEC action and the US Attorney’s criminal case are ongoing. The full press release issued by the SEC is available here.

©2019 Katten Muchin Rosenman LLP

TRENDING LEGAL ANALYSIS


About this Author

Michael T. Foley, Katten, Lawyer, Finance, FINRA, Chicago
Special Counsel

Michael Foley represents broker-dealers, investment advisers and other financial services industry participants with respect to a broad spectrum of legal and regulatory matters arising under the federal securities laws.

Michael has nearly 20 years of experience in private practice and in-house at both a large, full-service broker-dealer and at an online discount broker-dealer, advising broker-dealers and other financial institutions regarding compliance with the federal securities and commodities laws, and with the regulations of the US Securities and Exchange...

312-902-5452
Associate

Leonard Licht is an associate in the Financial Services practice. He advises a broad range of financial market participants, including investment managers to private funds and investors in private funds. Prior to joining Katten, Lenny practiced as a corporate and securities attorney and has also worked in an analytical capacity with a family office.

While in law school, Lenny was a Heyman scholar and member of the Moot Court Honor Society.

212-940-6587