Pushing The Edges of Insider Trading: Cuban and Dorozhko

Pushing The Edges of Insider Trading: Cuban and Dorozhko

 
The SEC seems to be pushing the limits of insider trading theory. Last week, the Commission lost the Cuban insider trading case, as discussed here. There, the SEC tried to bring an insider trading case based on the misappropriation theory using a complaint which alleged only that Mr. Cuban agreed at the beginning of a conversation with the CEO of a company in which he was a shareholder to keep the content of their talk confidential. The court rejected Mr. Cuban’s claim that the SEC had to establish that he breached a fiduciary duty. Rather, the court concluded that under certain circumstances a contractual duty would suffice. The SEC’s complaint however was held deficient. Whether the Commission will replead or push what is clearly an aggressive interpretation of the misappropriation theory remains to be seen.
 
In contrast, yesterday the SEC prevailed in an other cutting edge insider trading case, SEC v. Dorozhko, Case No. 08-0201-cv, Slip op. (2nd Cir. July 22, 2009). There, the Second Circuit reversed the denial of a preliminary injunction in the “computer hacker” case and remanded for further proceedings.
 
Dorozhko centers on a claim that the defendant, Oleksandr Dorozhko, a Ukrainian national and resident, traded on inside information in the securities of IMS Health, Inc. According to the SEC, in early October 2007 IMS announced it would release its third-quarter earnings during a conference call after trading on October 17, 2007. The company hired Thomson Financial to provide investor relations and web-hosting services including the release of its online earnings reports.
 
In the early afternoon of October 17, a computer hacker succeeded after several attempts in hacking into the secure server at Thomson and located the data regarding IMS. Shortly before 3:00 that afternoon defendant, who had opened but not used, a brokerage account at Interactive Brokers, purchased over $41,000 worth of IMS put options set to expire on October 25 and 30, 2007. These purchases represented about 90% of all such purchases.
 
After the close of the market, IMS announced its EPS were 28% below street expectations. When the market opened the next morning IMS shares went down 28%. Within six minutes of the market opening, defendant sold all of his options, realizing a profit of over $286,000.