The Securities and Exchange Commission (SEC) on Tuesday charged three Chinese men for trading on information stolen from two prominent New York-based law firms they hacked in 2014 and 2015.
According to the SEC, the three men, Iat Hong, 26, and Hung Chin, 50, residents of Macau, and Bo Zheng, 30, resident of Changsha, China, made almost $4 million in illegal profits from trading the nonpublic “market-moving information” stolen from the two firms, including confidential information pertaining to firm clients that were considering mergers or acquisitions.
The trio used various attack methods, including installing data-stealing malware on the law firms’ networks or the compromise of accounts that provided access to all email accounts used within the firms. Dozens of gigabytes of emails were copied and sent to remote Internet locations, SEC’s complaint alleges.
According to the complaint, Hong and Zheng were most interested in the emails of attorneys involved in mergers and acquisitions. They exchanged a list of partners who performed work at one of the law firms prior to the hack at that firm.
In addition to SEC charging the three, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges, some which carry maximum prison terms of 20 years.
The confidential information obtained from the hacked firms provided the three with insight into client companies’ planned transactions, which were expected to increase the value of said companies’ shares once the transactions were made public. Thus, the three purchased shares of at least five publicly-traded companies before such public announcements, only to sell the stock after the announcement, which resulted in profits of over $4 million.
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The SEC’s complaint alleges that Hong, Zheng, and Chin spent roughly $7.5 million to purchase shares in semiconductor company Altera in 2015, just before it became public knowledge that Intel was looking to acquire it. They bought around 25% of the e-commerce company Borderfree’s trading volume in advance of the announcement of a 2015 deal and did the same in 2014 with shares of InterMune, a pharmaceutical company.
“As alleged, the defendants – including Iat Hong, who was arrested in Hong Kong on Christmas Day – targeted several major New York law firms, specifically looking for inside information about pending mergers and acquisitions. They allegedly hacked into two prominent law firms, stole the emails of their M&A partners, and made over $4 million in illegal profits. This case of cyber meets securities fraud should serve as a wake-up call for law firms around the world: you are and will be targets of cyber hacking, because you have information valuable to would-be criminals,” Manhattan U.S. Attorney Preet Bharara said.
While the incident is the first time the SEC has charged indivisuals for hacking into law firms, in August 2015 the SEC charged a cybercriminal group for allegedly hacking into newswire services to steal non-public information about corporate earnings announcements that were used to make financial trades that generated more than $100 million in illegal profits.