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S.E.C. v. Dorozhko

United States Court of Appeals for the Second Circuit
574 F.3d 42 (2d Cir. 2009)


Oleksandr Dorozhko (defendant) had an online-trading account with Interactive Brokers LLC (Interactive). IMS Health, Inc. (IMS) announced that it would release its quarterly earnings during an analyst conference call. Thomson Financial, Inc. (Thomson) managed the online release of IMS’s earnings reports. Hours before the report’s official release, a computer hacker hacked into Thomson’s secure server and downloaded the IMS data from the server. Shortly after the hacking, Dorozhko, who had never used his Interactive account before, bought a significant amount of IMS put options. In buying these options, Dorozhko was betting that IMS’s stock price would decline within a two-day period by greater than 20 percent. Later that day, IMS announced that its earnings were 28 percent below Wall Street expectations. The next day, IMS’s stock price dropped 28 percent. Dorozhko sold his options and realized a huge profit overnight. Interactive noticed the irregular trading activity and reported it to the Securities and Exchange Commission (SEC) (plaintiff). The SEC alleged that Dorozhko was the hacker and brought a fraud claim under § 10(b) of the Securities Exchange Act of 1934 (the Act). The SEC argued that, when hacking, Dorozhko affirmatively misrepresented himself to gain access to material, nonpublic information and traded securities based on that information. The district court held a preliminary hearing and denied the SEC’s request for a preliminary injunction. Specifically, the district court held that computer hacking was not deceptive conduct under § 10(b). The district court reasoned that a breach of a fiduciary duty of disclosure was required for any deceptive conduct under § 10(b). Because Dorozhko owed no fiduciary duty to IMS or Thomson, because he was an outsider and had no relationship to either company, Dorozhko’s behavior did not violate § 10(b).

Rule of Law


Holding and Reasoning (Cabranes, J.)

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