New paper from Andrew Vollmer:
The purpose of this paper is to consider the strength of securities fraud charges asserted against computer hackers who used technical methods to obtain unauthorized access to corporate press releases before they were released to the public and traders who paid for the stolen information and used it to buy and sell securities. On the assumption that the factual allegations in charging documents are true, the defendants engaged in serious misconduct, but did they commit insider trading or securities fraud?
The paper uses a leading authority from the Second Circuit to show that an insider trading theory would nearly certainly fail. The general securities fraud charges against the hackers and traders are also weak. The government must prove that the hackers and traders committed a deception and that the deception was “in connection with” the purchase or sale of a security. Based on the allegations, the hackers probably used deception, but the factual basis for the “in connection with” element is novel. The traders bought and sold securities but engaged in no deceit at all.
I largely concur. I wrote about the relevant case, SEC v. Dorozhko, in my essay Regulating Insider Trading in the Post-Fiduciary Duty Era: Equal Access or Property Rights? (May 8, 2012), available at SSRN: http://ssrn.com/abstract=2054814. And several times here: