Original URL: http://www.theregister.co.uk/2008/02/19/insider_trading_catch22/

Hacker holds onto ill-gotten gains thanks to US courts

The Dorozhko Defense

By Dan Goodin

Posted in Security, 19th February 2008 21:19 GMT

This story was updated to correct an error in an earlier version. Dorozhko was never accused of breaking into networks belonging to IMS Health.

Oleksandr Dorozhko made almost $300,000 in stock-option trading by using insider information that was obtained after someone hacked into a financial network and stole confidential information concerning a company called IMS Health. Now, the Ukrainian resident is exploiting a loophole that may allow him to keep the ill-gotten gains for good.

That's because US securities laws, unlike those in Europe and elsewhere, define insiders as those with a fiduciary role with a company - say, a corporate executive, investment banker or attorney. As a mere hacker, or as an associate to a mere hacker, Dorozhko had no such function, so the laws cannot be used to seize the assets, a federal judge has ruled.

The strange tale, which was reported here by The New York Times, reads like a chapter out of Catch 22. According to evidence presented by the Securities and Exchange Commission, minutes after someone broke into a network of Thomson Financial and stole a gloomy IMS Health earnings report scheduled to go public a few hours later, Dorozhko invested a little more than $41,000 in put options that bet the company's share price would plunge.

And plunge it did. Dorozhko ended up pocketing more than $296,000 in the transaction. Not bad for a few hours work.

Just about everyone agrees he committed fraud and just about everyone agrees it was for the purpose of gaining an unfair advantage in trading shares of IMS Health. And yet, because the information was illegally obtained, US insider laws have no bearing, according to US District Judge Naomi Reice Buchwald, who ordered the SEC to turn over the money. Ironically, had the insider information been obtained legally, the SEC would most likely have been permitted to seize the funds.

Jeremiah Grossman, the CTO of WhiteHat Security, says here that the loophole, if left unclosed, could also aid hacks that technically don't require the bypassing of password requirements or other security measures. He notes that so-called predictable resource location hacks, in which a person guesses the location of a web document before it goes public, have already been used by Estonian stock traders.

Prosecutors with the Justice Department are probably free to file criminal charges against Dorozhko for computer hacking. But given his status as a Ukrainian, it's doubtful they'd succeed. And even if they did, it's even less likely they'd recover the proceeds.

So thanks to the arcana of US securities laws, illegal hacking does pay. ®