There is not much doubt that Ukranian Oleksandr Dorozhko used inside information when he made a killing trading stock options last fall. Nor is there a dispute that he gained the information illegally. His lawyer, arguing before an appeals court last week, spoke of "a high-tech lock pick."
But that does not mean that Dorozhko will have to forfeit the $296,456 he earned in one day of trading, starting just hours before the company in question announced disappointing earnings.
On Oct. 17, someone hacked into a computer system that had information on an earnings announcement to be made by IMS Health a few hours later.
Minutes after the breach of computer security, Dorozhko invested $41,671 in put options that would expire worthless three days later unless IMS shares plunged before that. The next morning the share price plunged, and Dorozhko made his money by selling the puts.
The Securities and Exchange Commission blocked him from collecting the profits from his brokerage account, but a federal judge has ordered the SEC to let him have the cash.
Dorozhko may keep the cash because of a strange anomaly in U.S. securities laws. A person who legally gets insider information - as a corporate official or an investment banker, for example - will almost certainly break the securities law if he or she trades on the basis of that information before it is made public.
But it is far less clear that someone who illegally gets their hands on such information will have violated the securities laws by trading on it.
The securities law used to bring insider trading charges - Section 10(b) of the 1934 Securities Exchange Act - talks of "a deceptive device or contrivance," and it is not clear that there is any deception involved in simple theft.
"Dorozhko's alleged 'stealing and trading' or 'hacking and trading' does not amount to a violation" of securities laws, Judge Naomi Reice Buchwald of U.S. District Court ruled in January.
Although he may have broken laws by stealing the information, the judge concluded, "Dorozhko did not breach any fiduciary or similar duty 'in connection with' the purchase or sale of a security." She ordered the SEC to let him have his profits.
She refused to dismiss the case, saying the SEC could try to prove he got a tip from an insider, but there does not appear to be evidence of that.
The SEC argues there was deception involved in hacking into the computer system, which was designed to allow access only to authorized people.
Congress could clear all this up with a simple amendment to clarify the law.
As Chief Justice Warren Burger once wrote, "A person who has misappropriated nonpublic information has an absolute duty to disclose that information or to refrain from trading." If it is illegal to trade on information acquired legally, why should it be legal to trade on information that was acquired illegally?