For the first time, the Securities and Exchange Commission has charged traders with hacking into law firms’ computer networks to obtain non-public information.

On Dec. 27, the SEC announced it had charged three Chinese nationals with fraudulently trading on nonpublic, market-moving information stolen from two prominent New York-based law firms. The trio raked in nearly $3 million in illegal profits from confidential information pertaining to firm clients considering mergers or acquisitions.

According to the SEC’s complaint, the alleged hacking incidents involved installing malware on the law firms’ networks, compromising accounts that enabled access to all e-mail accounts at the firms, and copying and transmitting gigabytes of emails to remote internet locations.

“We used enhanced trading surveillance and analysis capabilities that we developed over the last few years to identify the broad scope of the defendants’ alleged scheme, including the use of both U.S. and offshore accounts to carry it out,” Stephanie Avakian, acting director of the SEC’s Enforcement Division, said in a statement. 

Hong, Zheng, and Chin allegedly used the purloined confidential information to purchase shares in at least three public companies ahead of public announcements about entering into merger agreements. They spent approximately $7.5 million in a one-month period buying shares in semiconductor company Altera in advance of a 2015 report that it was in talks to be acquired by Intel.

Within 12 hours of extracting e-mails from one of the firms, Hong and Chin began purchasing shares of e-commerce company Borderfree so aggressively that they accounted for at least 25 percent of the company’s trading volume on certain days in advance of the announcement of a 2015 deal, the SEC says.Hong and Zheng also allegedly traded in advance of a 2014 merger announcement involving InterMune, a pharmaceutical company.

The SEC’s complaint charges Hong, Zheng, and Chin with violating the anti-fraud provisions of the federal securities laws and related rules. The SEC seeks a final judgment ordering them to pay penalties and disgorge ill-gotten gains plus interest and permanently enjoining them from violating the federal securities laws. Hong’s mother is named as a relief defendant in the SEC’s complaint for the purpose of recovering ill-gotten gains in her accounts resulting from her son’s alleged illicit trading. The Commission is also seeking an asset freeze that prevents the traders from cashing in on the illicit gains. 

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges.

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