Analysis The computer hacking and securities fraud ring that was broken up by US authorities this week was "one of the most intricate and sophisticated trading rings that we have ever seen," the US Securities and Exchange Commission has said.
Some 32 people were charged on Monday with offenses related to the scheme, which the SEC estimates netted more than $100m in illicit profits for the alleged co-conspirators.
Two men, Oleksandr Ieremenko and Ivan Turchynov, are accused of hacking into the computer systems of business news wires, which allowed them to gain access to press releases containing financial reporting and other sensitive information before it was published. They then allegedly sold that information to clients who would use it to place stock trades before the information became public.
The stocks heard 'round the world
In a statement, SEC chairwoman Mary Jo White said, "This international scheme is unprecedented in terms of the scope of the hacking, the number of traders, the number of securities traded and profits generated."
Of those named in the SEC's charges – which were filed by federal prosecutors in the US District Court in Newark, New Jersey – five have already been arrested in the US states of Georgia and Pennsylvania. Four more are said to currently be in Ukraine and international warrants have been issued for their arrests.
Others who have yet to be named publicly are said to reside in the US, Cyprus, France, Malta, Russia, and Ukraine.
The nine named defendants who have been arrested and charged have also been separately indicted by federal prosecutors in the US District Court in Brooklyn, New York on a different, but related set of charges.
Piecing together the two indictments – each of which identifies some of the defendants in the other only as "co-conspirators" – paints a picture of a brazen securities fraud scheme that went on for roughly five years.
'A special daytrading strategy'
According to the SEC's court filing, the alleged conspiracy began in 2010, when Ieremenko and Turchynov, two hackers based in Kiev, Ukraine, set out to break into servers run by business wire service companies, including Business Wire, Marketwired, and PR Newswire.
They're alleged to have used a variety of methods to attack the companies' security over the next three years, ranging from SQL injection, to malware and phishing, to brute force attacks. In the end, prosecutors claim, they successfully breached all three companies' security – and in so doing, they gained access to at least 300,000 non-public press releases.
Rather than sell the data through the usual black market sites, however, Ieremenko and Turchynov allegedly set up an online service of their own and operated it like a business, charging clients for access to the server.
The New York indictment cites email exchanges between users of the site in which they describe it as a "proprietary trading business" based on a "special daytrading strategy" in which the typical trader could expect monthly profits of "between $40,000 to $50,000."
Prosecutors claim Ieremenko and Turchynov even went as far as to provide customer support to their clients, emailing them tutorial videos explaining how to use the server containing the stolen press releases.
Business as usual
Because they were based in Ukraine, however, Ieremenko and Turchynov allegedly relied on US residents to drum up business for the scheme and make arrangements. The accused ringleaders were Arkadiy Dubovoy and his son, Igor, both of whom were based in Alpharetta, Georgia. A third relative, Pavel Dubovoy, appears to have acted as a go-between, spending part of his time in Alpharetta and part in Kiev.
Also named in the indictments are Alexander Garkusha of Alpharetta; Vitaly Korchevsky of Glenn Mills; Pennsylvania; Vladislav Khalupsky of Brooklyn, New York; and Leonid Momotok, of Suwanee, Georgia. All appear to have ties to Ukraine.
One interesting aspect of the case is that these men were not apparently career criminals, nor was securities trading the focus of their lives. Arkadiy Dubovoy, for example, owned a housing construction company called APD Developers, and Alexander Garkusha was its executive vice president.
Reuters reports that Korchevsky, on the other hand, appeared in court on Monday and was released on $100,000 bail – against the wishes of prosecutors, who considered him a flight risk – after his wife convinced the judge that most of Korchevsky's travel was in his role as a pastor.