Vitaly Korchevsky, a former Vice President at Morgan Stanley and hedge fund manager, and Vladislav Khalupsky, a securities trader, were convicted Friday in U.S. federal court of conspiracy to commit wire fraud, conspiracy to commit securities fraud and computer intrusion, conspiracy to commit money laundering and two counts of securities fraud.
The two were convicted in connection with their roles in an international scheme to hack into three business newswires and steal yet-to-be published press releases containing non-public financial information, which was then used to make trades that generated approximately $100 million in illegal profits.
The two men accomplished their aims by sending lists to hackers in Ukraine. The lists included the names of publicly traded corporations that the conspirators wanted data from ahead of the market. The publicly traded companies included, among hundreds of others: Align Technology Inc.; CA Technologies; Caterpillar Inc.; Hewlett Packard; Home Depot; Panera Bread Co.; and Verisign Inc. The scheme has been called the largest known hacking scheme to game financial markets to date, by U.S. officials. (Reuters)
Vitaly Korchevsky, was a mutual fund manager at Gardner Lewis Asset Management, a hedge fund based in Pennsylvania, before making his move to Morgan Stanley in 1999. According to SEC filings Korchevsky later began his own personal hedge fund, NTS Capital Fund, in 2011. (Bloomberg Law)
“The defendants teamed up with cybercriminal co-conspirators to hack pre-distribution press releases and then traded in the stock market based on that stolen information, making massive profits as a result,” stated United States Attorney Donoghue.
“Conspiring with hackers overseas, Korchevsky and Khalupsky worked swiftly to trade on stolen press releases, illegally profiting millions of dollars,” stated FBI Assistant Director-in-Charge Sweeney. “Such a massive criminal operation called for massive cover-ups, but their attempts to cover their tracks were done in vain.”
According to the statement from the U.S. Attorney’s Office, between February 2010 and August 2015, computer hackers based in the Ukraine gained unauthorized access into the computer networks of Marketwired L.P., PR Newswire Association LLC, and Business Wire (a subsidiary of Berkshire Hathaway), via a series of sophisticated cyberattacks. At one point, one of the hackers sent an online chat message in Russian to another individual stating, “hacking prnewswire.com.” The hackers moved through the computer networks and stole 150,000 press releases about upcoming announcements by public companies concerning earnings, revenues and other material non-public information.
To monetize the non-public information in the stolen press releases, the hackers shared those stolen press releases with a network of traders, including Korchevsky and Khalupsky, via overseas servers controlled by the hackers and/or through secure email accounts. Once they received the stolen press releases, Korchevsky and Khalupsky generally traded ahead of the public distribution of the stolen releases. In order to execute their trades before the releases were made public, Korchevsky and Khalupsky often had to execute trades in extremely short windows of time between when the hackers illegally accessed and shared information, and when the press releases were disseminated to the public by the newswires, usually shortly after the close of the markets. As a result, the trading data often showed a flurry of trading activity around a stolen press release just prior to its public release.
The trading by the network resulted in gains of more than $100 million, much of which was routed back to the hackers. Korchevsky traded on the stolen press releases both in accounts that benefited the criminal network as well as in his own personal accounts, and ultimately netted more than $15 million in profits over the course of the scheme. Khalupsky primarily traded in accounts that benefited the criminal network, and received a percentage of the profits he generated by trading on the stolen press releases, totaling at least $500,000 over the course of the scheme, according to the Department of Justice.
According to evidence presented by the U.S. Attorney at trial, the two men went to great lengths to conceal their roles in the criminal scheme. The conspirators used separate phones, computers and hotspots to conduct their illegal trading activity, and routinely deleted emails and/or destroyed hardware that contained evidence of their crimes. The conspirators also directed that payments received for the illegal profits they generated for the criminal network be made to offshore shell companies.
“This is a very sad day for Mr. Korchevsky and his family,” said Korchevsky’s attorney, “Although we respect the verdict, we disagree with it, and are disappointed. But the fight continues, and we look forward to availing ourselves of all legal options going forward.” (Bloomberg)
The charges against Korchevsky and Khalupsky were set forth in an indictment that was unsealed in August 2015. The verdicts followed a four-week trial, in Brooklyn, New York. The two men now face a maximum of 20 years’ imprisonment. Steven Brill, the attorney for Korchevsky, stated they plan a “full appeal” of the decision by United States District Judge Raymond J. Dearie. (RFE/RL)