The charges mark the first time that U.S. prosecutors have brought criminal charges for a securities fraud scheme that involved hacked inside information, in this case 150,000 press releases from distributors Business Wire, MarketWired and PR Newswire.
“In two indictments, one returned here in New Jersey and one in the Eastern District of New York, charging a total of nine individuals, we allege that the conspirators stole more than 100,000 news releases, traded ahead of more than 800 company releases, and made more than $30 million (USD),” explained Paul Fishman, the U.S. Attorney for New Jersey.
Separately, a U.S. Securities and Exchange Commission (SEC) civil lawsuit charged many others and said that thefts of inside information resulted in more than $100 million in illegal profits.
Prosecutors said that for five years since February 2010 hackers based in Ukraine infiltrated press releases before they were due to be released by the distributors. They included those that traders had put on “shopping lists” of releases that they wanted, prosecutors said.
The hackers created a “video tutorial” to help traders view the stolen releases, and were paid a portion of the profits from trades based on information contained there, prosecutors said.
“They took the release from point A on the newswire’s servers, moved them to another server that were accessible to the traders who could then look at them and read them and trade. And then those servers. . . the traders, once they made their money would then send money to overseas bank accounts in the name of fake companies, shell companies one and two they’re called in our indictment, so the hackers would have the benefit of those funds,” said Fishman.
The distributors were not charged with any wrongdoing. Fishman said authorities received “fabulous cooperation” from them.
Representatives with PR Newswire, a unit of UBM Plc, MarketWired and Business Wire could not immediately be reached or declined immediate comment.
The indictments said the news releases included sensitive corporate information such as financial results that would later become public. The news was passed to the traders, who made illegal trades in stocks and options based on the stolen information, and foreign shell companies were used to share the rewards, the indictments said.
Authorities said the scheme resulted in illegal profits on such companies as Acme Packet Inc, Align Technology Inc, Caterpillar Inc, Dealertrack Technologies Inc, Dendreon Corp, Edwards Lifesciences Corp and Panera Bread Co.
The indictment in Brooklyn charged four traders: Vitaly Korchevsky, 50, a former hedge fund manager from Pennsylvania; Vladislav Khalupsky, 45, of Brooklyn and Odessa, Ukraine; and Leonid Momotok, 47, and Alexander Garkusha, 47, of the U.S. state of Georgia.
A separate indictment made public in New Jersey charges Ivan Turchynov, 27, and Oleksandr Ieremenko, 24, two purported computer hackers who live in Ukraine; Pavel Dubovoy, 32, a trader from Ukraine; and Arkadiy Dubovoy, 51, and his son Igor Dubovoy, 28, traders from Georgia.
One indictment quotes online chats in which Ieremenko told Turchynov on March 25, 2012, that he had “bruted” the log-in credentials of 15 Business Wire employees, and told an unidentified recipient in Russian on Oct. 10, 2012, that “I’m hacking prnewswire.com.”
Charges brought against the various defendants include securities fraud, and conspiracies to commit securities fraud, wire fraud and money laundering.
Five of the defendants were arrested early on Tuesday, prosecutors said: Arkadiy and Igor Dubovoy, Momotok and Garkusha at their homes in Georgia, and Korchevsky at his home in Pennsylvania. International arrest warrants were issued for the other four, prosecutors said.
The SEC lawsuit charged 32 people and corporate entities with civil fraud. The lawsuit seeks civil penalties and has already resulted in a court-ordered freeze of assets, the SEC said in a statement.
The securities regulator has brought a handful of civil lawsuits in the past against individual hackers tied to insider trading. But they were all smaller than the case unsealed on Tuesday and none previously resulted in criminal charges.