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SEC charges Chinese traders with law firm hacking

First Published 29th December 2016

Chinese traders charged with trading on hacked nonpublic information stolen from two law firms. Marks first time SEC charges hacking into law firm computer networks.

Washington, DC - The Securities and Exchange Commission has charged three Chinese traders with fraudulently trading on hacked nonpublic market-moving information stolen from two prominent New York-based law firms, racking up almost $3 million in illegal profits. The SEC also is seeking an asset freeze that prevents the traders from cashing in on their illicit gains. The enforcement action marks the first time the SEC has charged hacking into a law firm's computer network.

The SEC's complaint alleges that Iat Hong, Bo Zheng, and Hung Chin executed a deceptive scheme to hack into the networks of two law firms and steal confidential information pertaining to firm clients that were considering mergers or acquisitions.

The incidents involved installing malware on the law firms' networks, compromising accounts that enabled access to all email accounts at the firms, and copying and transmitting dozens of gigabytes of emails to remote internet locations. Hong and Zheng in particular coveted the emails of attorneys involved in mergers and acquisitions as they exchanged a list of partners who performed the work at one of the law firms prior to the hack at that firm.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York announced criminal charges.

The SWC complaint said Hong, Zheng, and Chin used the stolen confidential information to purchase shares in at least three public companies ahead of public announcements about entering into merger agreements. The SEC alleges that they spent approximately $7.5 million in a one-month period buying shares in semiconductor company Altera Inc. in advance of a 2015 report that it was in talks to be acquired by Intel Corporation. Within 12 hours of emails being extracted from one of the firms, Hong and Chin allegedly began purchasing shares of e-commerce company Borderfree so aggressively that they accounted for at least 25 percent of the company's trading volume on certain days in advance of the announcement of a 2015 deal. Hong and Zheng also allegedly traded in advance of a 2014 merger announcement involving InterMune, a pharmaceutical company.

Hong's mother is named as a relief defendant in the SEC's complaint for the purpose of recovering ill-gotten gains in her accounts resulting from her son's alleged illicit trading.

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