TheCorporateCounsel.net

Earlier this week, the SEC announced that it had brought charges against yet another hacking ring accused of accessing earnings releases prior to issuance and trading based on the information obtained through the hack. The earnings announcements were accessed by hacking into the systems of two filing agent companies before the announcements were made public. In the complaint, the SEC alleges that the insider trading scheme yielded $82 million in profits during a period from February through August 2020.

As has been the case with many of the Division of Enforcement’s recent cases, the Staff credits powerful analytical tools for helping to make the case against the defendants. The complaint notes:

The trades by the Trader Defendants were disproportionately focused around the earnings announcements of publicly-traded companies that used the Servicers to make their EDGAR filings, as compared to earnings announcements where the required EDGAR filings were not made through the Servicers. Indeed, statistical analysis shows that there is a less than one-in-one-trillion chance that the Trader Defendants’ choice to trade so frequently on earnings events tied to the EDGAR filings of the Servicers’ public company clients would occur at random.

This latest hacking scheme points to the vulnerability of material nonpublic information when it is stored in the cloud prior to making the EDGAR filing. Despite all of the efforts to maintain the security of the systems used to process and store this information, sophisticated hackers can often find a way in. Unfortunately, there is not much that companies can do to protect themselves in this situation, other than to try to minimize the time that the submission is on the filing agent’s system. This is no doubt not the last of these schemes that the SEC will find with its sophisticated trading surveillance methods.

– Dave Lynn