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S.E.C. v. Dorozhko | 574 F.3d 42 (2d Cir. 2009)
In Securities and Exchange Commission versus Dorozhko, the Second Circuit considered whether a nonfiduciary can violate Section Ten B of the Securities Exchange Act of Nineteen Thirty Four.
I M S Health announced that it would release its third quarter earnings during a conference call at five p. m. on October seventeenth, two thousand seven. Early on the afternoon of the seventeenth, an anonymous computer hacker accessed the company’s earnings report, which had not yet been released. Less than an hour later, Oleksandr Dorozhko bought more than forty thousand dollars’ worth of put options on the company’s stock. Dorozhko had recently opened an online trading account, and the options purchase was his first transaction. The transaction was risky; it meant that Dorozhko was betting that the company’s stock value would decline by more than twenty percent within a few days. Dorozhko’s bet paid off. Shortly before the conference call, the company announced that its earnings were significantly lower than had been predicted. When the market opened the next morning, the company’s stock price plummeted twenty eight percent. Dorozhko immediately sold all his options, realizing a net profit of more than a quarter of a million dollars literally overnight. Dorozhko’s broker noticed the unusual trading activity and notified the Securities and Exchange Commission.
The commission alleged that Dorozhko was the hacker and sued him for fraud under Section Ten B of the Securities Exchange Act. The commission argued that Dorozhko had affirmatively misrepresented himself to gain access to the earnings report and had traded securities based on this information. The commission asked a federal district court to issue a preliminary injunction freezing the sale proceeds in Dorozhko’s brokerage account. The district court denied the commission’s request, holding that computer hacking is not deceptive conduct under Section Ten B because it doesn’t involve a breach of fiduciary duty. The commission appealed to the Second Circuit.
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