[ISN] SEC Sues Company For Using Hacked Information In Trades

From: InfoSec News (alerts@private)
Date: Tue Feb 27 2007 - 22:12:00 PST


By Sharon Gaudin
February 27, 2007

The Securities and Exchange Commission is suing a Hong Kong company for 
allegedly making more than $2.7 million from illegal trades they made by 
reading corporate press releases before they were made public.

The SEC filed a civil action on Monday against Blue Bottle, Ltd., a 
company chartered in Hong Kong but supposedly with offices in London, 
along with its owner and chief executive officer Matthew Charles Stokes. 
According to the SEC's complaint summary, Blue Bottle had inside 
information before it made trades by hacking into unidentified computer 
systems just before at least 12 companies were to make important press 
releases public.

Those 12 companies include BJ's Wholesale Club, Inc., Symantec Corp., 
RealNetworks, Inc., and Hornbeck Offshore Services, Inc.

The suit was filed in U.S. District Court in Manhattan.

"Since the beginning of January, the Defendants have traded just before 
news releases and at least 12 times in that limited period have amassed 
significant profits," the SEC notes in its complaint summary. "The staff 
of the Commission is conducting an ongoing investigation in an attempt 
to determine how the Defendants obtained the non-public information and 
to determine whether the Defendants used non-public information in other 

The SEC charges that Blue bottle was running an "ongoing fraudulent 
scheme" that entailed them buying stock or call options for a particular 
company the day before it was going to release positive news. If the 
company, however, was going to release negative news and the market 
value of its stock would likely decrease, Blue Bottle would buy put 
options or make short sales of the stock.

A call option is basically a contract that allows the buyer the right, 
but not the obligation, to buy an agreed upon amount of stock by an 
agreed upon date for a specific price. With call options, the buyer is 
betting the stock price will go up. A put option, on the other hand, is 
a high-stake bet that the company's stock will drop quickly. With puts, 
the investor only gets a payout if the stock goes down.

For instance, the SEC charges in its complaint summary that on Jan. 12 
Blue Bottle bought 10,500 put contracts on Symantec. They were betting 
that Symantec's stock price would drop by Jan. 20. On Jan. 16, which was 
the next trading day after Blue Bottle bought the puts, Symantec issued 
a downward revision of its third-quarter 2007 earnings and revenue 
forecast. The company also announced more "conservative guidance" for 
the rest of the fiscal year.

Symantec's news came out at 7:48 that morning, and Blue Bottle began 
selling its puts at 9:30 a.m. The trades made a profit of $1,030,471, 
according to the SEC.

The government also contends that Stokes provided inaccurate personal 
information when filing official corporate documents, as well as false 
address information for the company.

The SEC is asking the court to force Blue Bottle to repay "any and all 
ill-gotten gains", to pay an unspecified amount in civil penalties, and 
to stop acting in this manner.

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