Tuesday, July 20th, 2021

But is it one conspiracy? And is it securities fraud?

The answer to those questions is pretty much always “yes.” In United States v. Khalupsky, Nos. 19-197-cr, 19-780-cr (2d Cir. July 19, 2021), the Second Circuit affirmed the trial convictions of two defendants, rejecting various legal challenges. According to the circuit, the evidence at trial established that the defendants participated in a multi-year scheme to use stolen pre-publication press releases to make securities trades. Specifically, “hackers in Ukraine” “hacked into three newswires” that disseminated press releases for publicly traded companies, and passed those press releases to an intermediary (Dubovoy) before they were published. This intermediary then equipped and funded each defendant for trading, and gave them access to the releases. The defendants traded, kept a percentage of trading profits for themselves, and passed the rest back to Dubovoy.

On appeal, the defendants argued that there was not sufficient evidence to establish the existence of the single charged conspiracy, since they operated independently of one another as traders. The Second Circuit rejected this argument: Whether the government has proven a single or multiple conspiracies “is a question of fact for a properly instructed jury.” Conspirators must agree to participate in a “collective venture directed toward a common goal” and must know they are “involved with a larger organization”—but they need not know all the details of the conspiracy or the identity of all the other conspirators. By this standard, the government’s proof was sufficient.

The defendants also argued that two of their counts of conviction should be vacated because their crime did not constitute securities fraud within the meaning of Rule 10b-5. The circuit similarly rejected this argument. Rule 10b-5 prohibits deception “in connection with the purchase or sale of any security.” This does not mean that there must be deception of a buyer or seller of the security, or in the sale itself. Rather, “in connection with” must be read expansively. Here, the “hacking” involved deception because the hackers found and then used the login credentials of others, thereby “misrepresent[ing] themselves to be authorized users” of the computer system. This hacking, in turn, “directly prompted and enabled the charged securities trading.” That is sufficient for purposes of Rule 10b-5.

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