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“In the classic examples, the currency of insider trading was a personal relationship.” —Edward Stroz
relationship,” says Edward Stroz, a former FBI agent who’s now executive chairman of Stroz Friedberg, which advises firms on hacking schemes. “All of a sudden you have this possibility that never existed before, where proxy insiders can get information from an ocean away.” The ease of stealing insider details—without recourse to insiders—from an endless supply of law firms, journalists, and other parties in the financial world presents an enormous challenge to the ideal of a level playing field for the market. According to federal indictments unsealed on Aug. 11, hackers infiltrated the servers of PR Newswire, Marketwired, and Business Wire from 2010 to 2015. They worked under tight deadlines, sometimes scooping up the information they needed in as little as half an hour. As a result of one alleged hack of a Caterpillar earnings announcement, traders bought more than $8.3 million of the company’s shares and options, anticipating a pop in price the following day. The bet worked, netting the defendants about $1 million, according to prosecutors. The PR companies say they’re cooperating with prosecutors and examining their security systems. “This international scheme is unprecedented in terms of the scope of the hacking, the number of traders, the number of securities traded, and the profits generated,” SEC Chair Mary Jo White said at a news conference. The agency sued 17 individuals in a civil complaint, and prosecutors brought criminal charges against nine of them. Some defendants remain at large. The only professional U.S. trader arrested was Vitaly Korchevsky, of Glen Mills, Pa. He hasn’t entered a plea. SEC officials say the indictments show they’re onto hackers. But that’s far from clear, according to former officials, who note how hard it’s been for everyone from Hollywood stars to the U.S. Department of Defense to protect even the most intimate secrets. “With the ubiquity of hackers now, you can find people online who’ll do what you want for a pizza,” says Slade Griffin, director of security assessments for Contextual Security Solutions. “You combine the financial brilliance of someone that’s
criminally minded with the ease of access to hackers and hacking tools—why wouldn’t you do it?” In a news release announcing the hacking case, the SEC said it had traced a series of suspicious trades to the alleged conspirators. John Reed Stark, the SEC’s former head of Internet enforcement, says that, though hacking is often hard to detect, consistently trading on insider information leaves a different kind of trail the agency is good at spotting. There’s still plenty of uncertainty ahead, including statutes and case law that don’t contemplate hacking as an efficient means to gather vast quantities of illicit market intelligence, Stark says. He points to a recent federal court decision that held hackers must use deceptive methods to enter a computer network for the SEC to have jurisdiction. That would entail methods such as sending malwareloaded e-mail but might not include exploiting an existing security flaw in a company’s computer system. “To the average person, hacking into a computer in order to get information to trade on would be illegal,” Stark says. “But depending on how it’s done, it might be theft but not necessarily securities fraud.” —Keri Geiger, Michael Riley, and Jordan Robertson
The bottom line U.S. authorities say hackers illegally accessed 150,000 news releases, an example of a new form of insider trading.
China
Alibaba’s $105 Billion Wipeout The e-commerce giant’s market cap has sunk the most in the world “Investors don’t think Alibaba can uncouple” from China’s slowdown
It took less than a year for Alibaba Group Holding to turn from a stock market darling into the biggest source of shareholder losses worldwide. From its peak, two months after a September 2014 initial public
Bid/Ask: Planes, trains, and automobiles 39
Ali-bomb-a $120 $100 $80 BABA share price $60 9/2014
8/2015 DATA COMPILED BY BLOOMBERG
offering—the largest ever, at $25 billion— the company has lost $105 billion in market capitalization, the equivalent of Bristol-Myers Squibb’s in its entirety. Now China’s biggest e-commerce operator is plotting its comeback. The Aug. 10 purchase of a stake in Suning Commerce Group, Executive Chairman Jack Ma’s largest deal, is part of the company’s push to reach millions of new customers in rural % China and abroad. The strategy may take time to work, Alibaba’s sales growth last quarter, though, and Wall down from an Street is showing average of signs of impatience 56 percent for since the release the previous 12 of Alibaba’s quarterly results on Aug. 12. Shares fell after sales grew at the slowest pace in at least three years. Analysts at Atlantic Equities and Pacific Crest Securities downgraded the stock to neutral. Still, 85 percent of analysts tracked by Bloomberg recommend buying Alibaba, forecasting a 29 percent rally over the next year, the third-biggest projected return among the world’s 25 largest companies. Investors are concerned that the e-commerce market is reaching saturation in China’s larger, wealthier cities. Meanwhile, China’s economy is growing at its weakest pace since 1990. “The growth slowdown will continue to be a problem,” says Li Muzhi, a Hong Kong-based analyst at Arete Research Services. “Investors don’t think Alibaba can uncouple from the overall slowdown in China, especially when the majority of its revenue still comes from within the country.” Alibaba also announced plans to buy back $4 billion of stock over a two-year period, mainly to offset shares paid out to keep and attract
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