by T. GormanPosted on Posted in SECActions

Eight defendants settled with the Commission in one of its largest cyber security actions, the newswire trading and hacking scheme. SEC v. Dubovoy, Civil Action No. 2:15-cv-06076 (D.N.J.). The settling defendants are Arkadly Dubovoy, Igor Dubovoy, Southeastern Holding and Investment Company LLC, APD Developers, Inc., Leonid Momotok, Aleksandr Garkusha, Vladislav Khulupsky, and Memeland Investments Ltd. The court approved the settlements.

The action centered on a group of international hackers and traders along with a number of related entities. Defendants hacked two news services, obtaining advanced information on various transactions used to insider trade. The action, filed five years ago, initially named 17 individuals and 15 entities. The scheme supposedly yielded over $100 million in illegal trading profits.

The Commission’s complaint divided defendants into three groups: 1) The hacker defendants: Oleksandr Ieremanko and Ivan Turchynov, both residents of Kiev, Ukraine; 2) the trader defendants—the Dubovoy Group, composed of twelve individuals and entities headed by Arkadiy Dubovoy of Alpharetta, Georgia; and 3) the foreign trader defendants, consisting of eighteen persons residing in Russia and Ukraine. The entities involved were from Malta, the Cayman Islands, Cyprus and France.

The hacker defendants penetrated the computer services of at least two newswire services. This was done using a variety of advanced techniques which included masking their identities by posing as newswire employees and customers. As a result, the hackers were able to acquire advance copies of corporate press releases before distribution to the public. Over time this gave the hackers access to press releases regarding companies which included: Catepillar, Inc., TreeHouse Foods, Inc., RadioShack, Zumiez, Inc., Brocade Communications Systems, Edwards Life Sciences, Panera Bread Co., VMware, Inc., TIBCO Software and Align Technology. Overall the hackers are alleged to have obtained over 100,000 press releases.

The information obtained by the hacker defendants – Messrs. Ieremanko and Turchynov – was transmitted to the traders. The traders had been recruited with a video which showcased the ability of the hackers to obtain inside information. The information had to be transmitted in a narrow window of time before the release by the newswires of the press releases. The members of the trader group placed trades through a variety of accounts using the information prior to the public release of the information. The hacker defendants were paid either a flat fee or a percentage of the trading profits. At times the traders in the groups communicated with each other and the hackers had access to various trading accounts. The Commission’s complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 20(a) and 20(e).

Previously, in parallel criminal actions filed in the Eastern District of New York and the District of New Jersey, defendants Momotok, Garkusha and Khalupsky were convicted. They were each sentenced and ordered to pay restitution and forfeit assets. Defendants Arkadiy Dubovoy and Igor Dubovy pleaded guilty and are awaiting sentencing.

The final judgments entered in the Commission’s action each enjoined defendant from future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The final judgments as to Arkadiy Dubovoy, Igor Dubovoy, Southeastern Holding, ADP Developers, Momotok, Garkussha and Khalupsky direct them to pay disgorgement and prejudgment interest, deemed satisfied by the restitution and forfeiture orders entered against the individuals. Memelland, not charged in the criminal cases, has agreed to pay disgorgement and a civil penalty. Collectively the monetary liabilities imposed exceed $14 million. Previously, the Commission settled with 13 defendants who consented to injunctions. The agency has recovered over $50 million. See Lit. Rel. No. 24833 (June 10, 2020).

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by T. GormanPosted on Posted in SECActions

Insider trading is often thought of as difficult problem to detect and a complicated violation to prosecute. Sometimes that is true. The Commission has brought a number of very difficult and complex actions over the years. Many of those involved multi-million dollar transactions and trading into the U.S. markets from foreign countries. Nevertheless, the Commission and its data analytics team is able to tack together bits and pieces of trading, information about IP addresses and telephone or text records to quickly bring an action against those involved.

Other cases are smaller, involving trading in the thousands of dollars and only in the U.S. While these cases do not draw the headlines like the huge multi-million deal where eight figure trading profits are not uncommon, the agency still diligently puts together the bits and pieces of evidence to prove the case. And, contrary to what many believe, the same effort goes into prosecuting the small, one-person case and a few thousand dollars of trading profits – its all illegal. That is at least one lesson from the Commission’s most recent case in the area, Jana Faith Kiena, CPA, Adm. Proc. File No 3-19824 (June 5, 2020).

Ms. Kiena, a CPA with an inactive license, was employed at Illumina, Inc. in the revenue department in 2019 as a contract employee. She processed revenue related to monthly service contracts for the firm. She also participated in what the firm called “group huddles” – phone meetings where the staff chatted about the revenue flow.

In late June 2019 Ms. Kiena participated in one “huddle” with seven other employees and an accounting manager. The group in the huddle learned that revenue for the quarter would be disappointing. On July 2, 2019 Ms. Kiena used her credit card to obtain a cash advance. She then paid $13,638.33 to purchase July 12, 2019 put option contracts on ILMN, her firm The strike price was $365 per share. Six days later she took $3,096 from her savings account and purchased more put options.

On July 11, 2019 Illumina announced that its preliminary revenue for the second quarter would be lower than expected, updating full year guidance. The stock price dropped from $363.66 to $305.05 or 16%. The next day Ms. Kiena sold the put options, securing a gain of $249,227.92. Within a month Ms. Kiena self-reported to the Commission staff. The Order alleges violations of Exchange Act Section 10(b).

To resolve the proceedings Ms. Kiena consented to the entry of a cease and desist order based on the section cited in the Order. She also agreed to the entry of an order denying her the privilege of practicing before the Commission as an accountant with the right to request consideration for a reinstatement after two years. In addition, she will pay disgorgement in the amount of her trading profits and a penalty equal to half that amount.

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