The Securities and Exchange Commission has brought charges against nine defendants for participating in a previously disclosed scheme to hack into the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system and extract non-public information to use for illegal trading.
The intrusion into the SEC's EDGAR system took place in 2016. The SEC said it immediately initiated a series of review and response initiatives, including promptly disclosing the incident and its response to the public and to Congress. “In the subsequent months, we have pursued various review and uplift efforts around the EDGAR system and the SEC's information technology systems more broadly,” SEC Chairman Jay Clayton said in a statement. Clayton discussed these efforts in detail in Congressional testimony.
“Importantly, one of the agency’s principal efforts around the EDGAR intrusion has been the Division of Enforcement’s investigation into potentially illicit trading related to information that was stolen from the SEC,” Clayton added. “We have conducted our investigative efforts in valuable partnership with law enforcement.”
In the latest action, the SEC on Jan. 15 charged a Ukrainian hacker, six individual traders in California, Ukraine, and Russia, and two entities. The hacker and some of the traders were also involved in a similar scheme to hack into newswire services and trade on information that had not yet been released to the public. The SEC charged the hacker and other traders for that conduct in 2015.
The SEC’s complaint alleges that after hacking the newswire services, Ukrainian hacker Oleksandr leremenko turned his attention to EDGAR and, using deceptive hacking techniques, gained access in 2016. leremenko extracted EDGAR files containing non-public earnings results. The information was passed to individuals who used it to trade in the narrow window between when the files were extracted from SEC systems and when the companies released the information to the public. In total, the traders traded before at least 157 earnings releases from May to October 2016 and generated at least $4.1 million in illegal profits.
“International computer hacking schemes like the one we charged today pose an ever-present risk to organizations that possess valuable information,” Enforcement Division Co-Director Stephanie Avakian said in a statement. “Today’s action shows the SEC’s commitment and ability to unravel these schemes and identify the perpetrators even when they operate from outside our borders.”
“The trader defendants charged today are alleged to have taken multiple steps to conceal their fraud, including using an offshore entity and nominee accounts to place trades,” said Enforcement Division Co-Director Steven Peikin. “Our staff’s sophisticated analysis of the defendants’ trading exposed the common element behind their success, providing overwhelming evidence that each of them traded based on information hacked from EDGAR.”
The SEC’s complaint alleges that Ieremenko circumvented EDGAR controls that require user authentication and then navigated within the EDGAR system. Ieremenko obtained non-public “test files,” which issuers can elect to submit in advance of making their official filings to help make sure EDGAR will process the filings as intended. Issuers sometimes elected to include non-public information in test filings, such as actual quarterly earnings results not yet released to the public. Ieremenko extracted non-public test files from SEC servers and then passed the information to different groups of traders.
The SEC’s complaint alleges that the following traders received and traded on the basis of the hacked EDGAR information:
- Sungjin Cho, Los Angeles, California
- David Kwon, Los Angeles, California
- Igor Sabodakha, Ukraine
- Victoria Vorochek, Ukraine
- Andrey Sarafanov, Russia
- Ivan Olefir, Ukraine
- Capyield Systems (owned by Olefir)
- Spirit Trade
In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced related criminal charges.
The SEC’s complaint charges each of the defendants with violating the federal securities anti-fraud laws and related SEC anti-fraud rules and seeks a final judgment ordering the defendants to pay penalties and return their ill-gotten gains with prejudgment interest and enjoining them from committing future violations of the anti-fraud laws. The SEC also named and is seeking relief from four relief defendants who profited from the scheme when defendants used the relief defendants’ brokerage accounts to place illicit trades.