Medtech Hackers May Dodge Insider Trading Charges

The computer hackers who stole earnings data from Edwards Lifesciences (NYSE:EW), Align Technology (NSDQ:ALGN), and others reaped millions of dollars in profits, but didn't exactly rip off or betray the companies.

Nancy Crotti

The U.S. Justice Department has accused two Ukrainians of stealing earnings reports from Business Wire, Marketwired, and PR Newswire before they were published. They allegedly shared that information with 30 others in the U.S. and abroad, whom the Justice Department has charged with securities fraud, wire fraud, conspiracy, and computer-related violations for purportedly trading company stock based on those reports.

The SEC filed parallel civil charges, but may have a harder time making them stick, according to a recent White Collar Watch column in The New York Times.

That's because the defendants in the elaborate scheme appeared to obtain inside information, but they're not insiders--people who "owe a duty of trust and confidence" to any of the companies involved.

They can't be charged with insider trading, but is it securities fraud? The government may have a rough time proving it, based on legal precedent, writes columnist and Wayne State University law professor Peter J. Henning.

Henning posits that wire fraud charges are more likely to stick, because the defendants allegedly devised a scheme to transmit information that would enable them to obtain money "by means of false or fraudulent pretenses, representations or promises." If found guilty of wire fraud, they could be fined or imprisoned for up to 20 years, or both.

The SEC has charged others with stealing financial information and profiting from it before it was made public. In 2005, the agency sued an Estonian financial services company and two employees for allegedly obtaining news releases of more than 200 companies through a fake Business Wire account, Henning writes. If securities laws applied to their case, we'll never know. The case was settled without any conclusion about whether securities law was violated.

The U.S. Supreme Court, in S.E.C. v. Zanford, found that securities the deceit need only "coincide" with the transactions. In that case, however, a broker was accused of stealing from clients, people to whom he owed a legal duty.

Where does this leave the SEC? Perhaps empty-handed. Stay tuned.

Nancy Crotti is a contributor to Qmed and MPMN.

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