SEC Sues Company For Using Hacked Information In Trades

Symantec and RealNetworks corporate press releases were among those accessed by Blue Bottle before they were made public and used to make insider trades, the agency claims.

Sharon Gaudin, Contributor

February 27, 2007

3 Min Read

The Securities and Exchange Commission is suing a Hong Kong company for allegedly making more than $2.7 million from illegal trades they made by reading corporate press releases before they were made public.

The SEC filed a civil action on Monday against Blue Bottle, Ltd., a company chartered in Hong Kong but supposedly with offices in London, along with its owner and chief executive officer Matthew Charles Stokes. According to the SEC's complaint summary, Blue Bottle had inside information before it made trades by hacking into unidentified computer systems just before at least 12 companies were to make important press releases public.

Those 12 companies include BJ's Wholesale Club, Inc., Symantec Corp., RealNetworks, Inc., and Hornbeck Offshore Services, Inc.

The suit was filed in U.S. District Court in Manhattan.

"Since the beginning of January, the Defendants have traded just before news releases and at least 12 times in that limited period have amassed significant profits," the SEC notes in its complaint summary. "The staff of the Commission is conducting an ongoing investigation in an attempt to determine how the Defendants obtained the non-public information and to determine whether the Defendants used non-public information in other trades."

The SEC charges that Blue bottle was running an "ongoing fraudulent scheme" that entailed them buying stock or call options for a particular company the day before it was going to release positive news. If the company, however, was going to release negative news and the market value of its stock would likely decrease, Blue Bottle would buy put options or make short sales of the stock.

A call option is basically a contract that allows the buyer the right, but not the obligation, to buy an agreed upon amount of stock by an agreed upon date for a specific price. With call options, the buyer is betting the stock price will go up. A put option, on the other hand, is a high-stake bet that the company's stock will drop quickly. With puts, the investor only gets a payout if the stock goes down.

For instance, the SEC charges in its complaint summary that on Jan. 12 Blue Bottle bought 10,500 put contracts on Symantec. They were betting that Symantec's stock price would drop by Jan. 20. On Jan. 16, which was the next trading day after Blue Bottle bought the puts, Symantec issued a downward revision of its third-quarter 2007 earnings and revenue forecast. The company also announced more "conservative guidance" for the rest of the fiscal year.

Symantec's news came out at 7:48 that morning, and Blue Bottle began selling its puts at 9:30 a.m. The trades made a profit of $1,030,471, according to the SEC.

The government also contends that Stokes provided inaccurate personal information when filing official corporate documents, as well as false address information for the company.

The SEC is asking the court to force Blue Bottle to repay "any and all ill-gotten gains", to pay an unspecified amount in civil penalties, and to stop acting in this manner.

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