SEC v. Dubovoy: Asset Freeze for Illegal Trading

In Securities and Exchange Commission v. Dubovoy, No. 15-6076, 2015 BL 341390 (D.N.J. Oct. 16, 2015), the United States District Court for the District of New Jersey granted the Securities and Exchange Commission’s (“SEC”) motion for a preliminary injunction freezing assets against David Amaryan, Intertrade, Ocean Prime, Copperstone Capital, and Copperstone Alpha Fund (collectively, the “Amaryan Defendants”). The court found the SEC successfully raised a strong inference that the Amaryan Defendants violated federal securities laws. 

The complaint arose out of an alleged scheme to trade on information hacked from newswire services.  The information came from three publishers: Marketwired, PRN, and Businesswire (“Newswire Services”).  The Newswire Services electronically stored press releases on its servers before the subsequent release to the public. 

Two “Hacker Defendants” allegedly hacked Newswire Services’ computer systems and stole thousands of press releases before they were released to the public. The Hacker Defendants then allegedly passed the information to the Trader Defendants, including the Amaryan Defendants, who then traded the hacked information. The Trader Defendants collectively produced more than $100 million in illegal profits, with the Amaryan Defendants allegedly generating over $8 million. Accordingly, the SEC sought a preliminary injunction to maintain the freeze on the Amaryan Defendants’ assets. 

To be successful in a preliminary injunction to maintain an asset freeze, a plaintiff must show either: (1) a likelihood of success on the merits; or (2) that an inference can be drawn that the party violated federal securities laws. The court may also factor in concerns that a defendant will dissipate their assets or transfer them beyond jurisdiction of the United States. The burden of proof increases depending on the potential hardship an asset freeze will create for a defendant. 

The court held the SEC satisfied its burden to maintain the asset freeze.  The SEC offered evidence of Amaryan Defendants’ suspicious trading activity and provided expert statistical analysis for corroboration. The court found it persuasive that the Amaryan Defendants’ trading activity mirrored the pattern of the Hacker Defendants’ access to the Newswire Services.  Id. (“The SEC first demonstrated that, during the relevant period, the Amaryan Defendants’ trading activity mirrored the Hacker Defendants’ oscillating access to the Newswire Services.”).

The court further reasoned that the Amaryan Defendants’ trading pattern overlapped with other Trader Defendants accused of illegal trading activity.  Id. (“At times, other Trader Defendants would take a position in a security during the window within mere minutes of the Amaryan Defendants.”). 

The court also found the timing of the Amaryan Defendants’ trades suspicious, as they almost always traded during the narrow window of time between the upload of the press releases to Newswire Services and public dissemination. Id. (“The SEC next demonstrated that the Amaryan Defendants almost always traded during the narrow window of time between upload of the press release to the newswire service and the public dissemination of that press release.”).  Finally, the court found convincing, the statistical analysis of the SEC’s retained expert, which analyzed, “questioned,” and “challenged” trades by the Amaryan Defendants and found strong correlations in the trading patterns.

Amaryan Defendants’ expert, however, who purported to establish the existence of a legitimate trading strategy citing fundamental methodological flaws, did not persuade the court. The court found the expert’s conclusions about the profitability of trades failed to account for a single anomalous trade consisting of virtually all of the $25.4 million in profits, and dismissed the expert’s conclusion that the timing of the trades was industry custom given that investors frequently traded in periods surrounding earnings releases. Finally, the court reasoned that no potential hardship due to an asset freeze would justify lifting the restraint.

Accordingly, the court granted the SEC’s preliminary injunction to freeze the Amaryan Defendants’ assets.

The primary material for this case can be found on the DU Corporate Governance Website.