Authorities arrest individuals on charges of insider trading
Nine individuals have been charged with security fraud, wire fraud and money laundering, according to the SEC. Five of these individuals have been arrested, and there are international arrest warrants for the remaining four.
These individuals, officially charged on Aug. 11, have been involved in a five-year scheme of insider trading and hacking. They supposedly hired Ukrainian hackers to penetrate the walls of Marketwired, PR Newswire and Business Wire in order to obtain sensitive corporate information, such as financial results not yet available to the public. This information was then used to make profitable investments.
The three firms are provided with news releases containing corporate information embargoed until a certain time. The information, released to the masses through the media outlets, drives the stock market prices up or down.
In this scheme, the hackers received “shopping lists” from the traders specifying the stocks and companies in which they were interested in. With hackers penetrating the servers and providing select traders with directions to access this sensitive information, traders were able to make illicit profits and give a portion of it to the hackers. Profits were shared between hackers and traders through shell companies, which allow business transactions without actually owning any significant assets or conducting any operations.
Though the information firms were not involved in the scheme and were very cooperative with the investigation, they may be impacted negatively as companies cannot trust their corporate information will be secure. In recent years, more and more companies, including Google and Microsoft have begun to decrease dependency on press release companies by publishing important information directly on their own websites. After the revelation of this prolonged hack into their servers, the firms have stated that they take security very seriously and have the best in place. This goes to show the sophistication with which hackers operate. A similar case occurred on a smaller scale in 2005 when Estonian traders hacked into Business Wire for news releases. They, too, provided insider information to their traders. Business Wire, a unit of Warren Buffet’s Berkshire Hathaway, Inc., has now employed a company to test its security systems again.
Over the course of the five years, this loose, illegal business alliance obtained over 150,000 news releases of which they selected around 800 releases upon which to act. This was a strategic decision to maintain a low profile. In total, the traders and hackers made illicit profits of over $100 million. The nine that have been charged have made roughly $30 million since Feb. 2010.
However, the SEC was able to detect the suspicious trading long-term pattern. They used technology to identify related traders who could be connected to the scheme. The SEC tipped off investigators from various law enforcement agencies, who began an investigation in the United States and another focused on foreign hacks. The investigations lasted two years.
Indictments were administered in the District of New Jersey and the Eastern District of New York. Vitaly Korchevsky, Vladislav Khalupsky, Leonid Momotok and Alexander Garkusha were arrested in Brooklyn. The remaining five charges were made under the District of New Jersey, including Ivan Turchynov, Oleksandr Ieremenko, Pavel Dubovoy, Arkadiy Dubovoy and Igor Dubovoy. Turchynov and Ieremenko are two hackers who live in Ukraine. They explicitly communicated and stated their activities via email and online messaging.
Authorities recovered millions of dollars from the accounts of these traders and hackers and administered court ordered asset freezes. Boats, houses and complexes were seized from the convicted.
The formation of the business alliance may be connected to the backgrounds of the traders themselves. Of the nine convicted, three of them have Ukrainian ties or origins. The mastermind behind this scheme has not yet been determined, if any exists. However, the only individual identified with a professional background in trading is Korchevsky, a hedge fund manager and a previous Morgan Stanley employee. He made a profit of $17 million through this scheme. He was released on a $100,000 bond and told to surrender his passport to the authorities. Prosecutors however, are asking another judge for a revocation of his release.
Similar cases to this large-scale insider-trading scheme have occurred in the past two months. In June 2015, four individuals were arrested and charged with single and multiple counts of security fraud. These individuals were entrusted with confidential information that had not yet been made public. However, they used the given information to trade companies’ stocks for illicit profits measuring over $3.2 million.
Another scheme to manipulate the stock market was uncovered last month when five people were charged with stealing the account information of 83 million customers from JPMorgan Chase servers. The conspirators planned to use the email addresses for spam mail distribution that would help hike the prices of worthless penny stocks.
Those charged on Aug. 11 managed to combine hacking with insider trading to make illicit profits. This most recent scheme was well articulated, methodical and market-savvy. The defendants and all others involved remained patient, part of the reason why the scheme remained concealed for nearly five years.