Securities And Exchange Commission v. Dorozhko

574 F.3d 42 (2009)

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Nature of the Case

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Facts

Dorozhko (D), opened an online trading account and deposited $42,500 into that account. IMS Health, Inc. ('IMS') announced that it would release its third-quarter earnings during an analyst conference call scheduled for October 17, 2007, at 5 p.m.--that is, after the close of the securities markets in New York City. An anonymous computer hacker attempted to gain access to the IMS earnings report by hacking into a secure server prior to the report's official release. At 2:15 p.m.--minutes after data had been received--that hacker successfully located and downloaded the data from the secure server. Beginning at 2:52 p.m., D--who had not previously used his account to trade--purchased $41,670.90 worth of IMS 'put' options that would expire on October 25 and 30, 2007. This was 90% of all purchases of 'put' options for IMS stock for the six weeks prior to October 17. D was betting that IMS's stock price would decline precipitously (within a two-day expiration period) and significantly (by greater than 20%). At 4:33 p.m.--IMS announced that its earnings per share were 28% below 'Street' expectations. When the market opened the next morning, October 18, at 9:30 a.m., IMS's stock price sank approximately 28% almost immediately--from $ 29.56 to $ 21.20 per share. Within six minutes of the market opening, D had sold all of his IMS options, realizing a net profit of $ 286,456.59 overnight. P alleges that D was the hacker. The District Court denied P's request for a preliminary injunction because the P had not shown a likelihood of success. The District Court ruled that computer hacking was not 'deceptive' within the meaning of Section 10(b). It reasoned that 'a breach of a fiduciary duty of disclosure is a required element of any 'deceptive' device under § 10b.' D owed no fiduciary duty to anyone and while per se fraudulent and violative of other laws, the court concluded that this behavior did not violate Section 10(b) without an accompanying breach of a fiduciary duty. P appealed.