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Speaker 1: It's a combination of cyber crime and insider trading, and

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Speaker 1: it's aimed at the law firms doing the legal work

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Speaker 1: for mergers. Manhattan federal prosecutors have charged three Chinese hackers

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Speaker 1: with making more than four million dollars and illicit profits

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Speaker 1: by trading on information they got from breaking into the

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Speaker 1: servers of top corporate law firms in New York. They

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Speaker 1: would steal emails of partners working on mergers, but by

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Speaker 1: shares of target companies and sell them after the deals

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Speaker 1: were announced. Our guest is Christian Berthelson. He wrote about

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Speaker 1: this for Bloomberg News. He's the Bloomberg News Federal court reporter. Christian.

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Speaker 1: It's a new twist on insider trading where you don't

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Speaker 1: have to actually know and talk to an insider. Did

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Speaker 1: they how did they get into the systems? Yeah? This

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Speaker 1: is a sort of a new twist on the insider

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Speaker 1: trading prosecutions which we've seen a lot of since the

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Speaker 1: UH sort of end of the financial crisis. In this case,

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Speaker 1: the hackers seem to have started out by stealing the

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Speaker 1: log on information of of law firm employees at these

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Speaker 1: elite transaction law firms UH and then using that access

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Speaker 1: to then place malware that would allow them continued access

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Speaker 1: to the system and to emails of partners that we're

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Speaker 1: working on the transactions, and enabled them to to take

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Speaker 1: an enormous amount of both data and email communications between

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Speaker 1: partners who were working on the deals over a bit

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Speaker 1: more than a year's time from and in those emails,

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Speaker 1: they're getting all the details of these transactions, because that's

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Speaker 1: what the lawyers are talking about. It's correct. I mean

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Speaker 1: these in some cases, these were the partners who were

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Speaker 1: directly responsible for handling the legal work on the transactions.

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Speaker 1: The information at their disposal was incredibly detailed and of

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Speaker 1: course incredibly sensitive and in secret at the time, so

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Speaker 1: it gave these hackers a real bird's eye view into

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Speaker 1: these transactions and how they were pricing and what the

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Speaker 1: timing was on them and that sort of thing. Um. Ultimately,

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Speaker 1: some of the transactions were not consummated, but it appears

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Speaker 1: from the charging documents that in nearly all cases they

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Speaker 1: still wound up making money on them, because you know,

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Speaker 1: there would be media reports that talks were in the works,

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Speaker 1: or in one case, another buyer swooped in and you know,

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Speaker 1: the transaction that was being contemplated didn't happen, but then

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Speaker 1: a second buyer came in uh and took it over,

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Speaker 1: and so they still they still wound up making money.

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Speaker 1: They weren't always successful during you write that during one

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Speaker 1: six month period last year, they allegedly tried on more

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Speaker 1: than one hundred thousand occasions to break into the networks

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Speaker 1: of five law firms. Was there something about the protection

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Speaker 1: those law firms had that stopped them? I believe there

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Speaker 1: were seven law firms that were targeted by the group,

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Speaker 1: but only to whose networks were actually penetrated, So uh,

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Speaker 1: they did have difficulty accessing the systems of five other

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Speaker 1: firms that were involved in these deals. UM, I mean

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Speaker 1: in to try one hundred thousand times in six months,

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Speaker 1: I think that works out to an attempt of about

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Speaker 1: five hundred five hundred attempts per day, which suggested they

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Speaker 1: were using some kind of computerized program uh to to

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Speaker 1: attempt these hacks, and you know, not that they were

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Speaker 1: sort of manually trying to key in each time. This

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Speaker 1: isn't the first time that law firms have been hacked,

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Speaker 1: is it. I think actually this is a relatively new

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Speaker 1: wrinkle in the in the hacking for insider trading scheme.

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Speaker 1: I mean, we've seen cases before where hackers access the

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Speaker 1: networks of like pr Newswire and business wire. You know

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Speaker 1: companies that uh that publish um sensitive deal information when

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Speaker 1: it's to be announced and and so you've seen them

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Speaker 1: sort of try to access information that way. But in

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Speaker 1: terms of of attacking and hacking the law firms that

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Speaker 1: are directly involved in the deal, I don't think that's

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Speaker 1: something we've seen before. Manhattan US Attorney Preet Berarra says

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Speaker 1: the case of cyber Meats securities fraud should serve as

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Speaker 1: a wake up call for law firms around the world.

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Speaker 1: So what will this wake up call make them? Do

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Speaker 1: you know, it's one case. I don't know if it's

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Speaker 1: possible to generalize about the quality of of security um

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Speaker 1: practices at law firms sort of across the industry. But

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Speaker 1: I think any major law firm, particularly those that are

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Speaker 1: working on transactional type of work, are probably like they're

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Speaker 1: going to take a look at their own systems and

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Speaker 1: ensure that they've got sort of best practices when it

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Speaker 1: comes to maintaining top security practices. Do we know how

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Speaker 1: the federal prosecutors or the sec discovered that this was

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Speaker 1: going on. That is not laid out in the documents

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Speaker 1: that have been made public so far. I mean, the

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Speaker 1: enforcement agencies have have pretty detailed means these days of

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Speaker 1: seeing who is trading before announcements are made, or you know,

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Speaker 1: who is trading insecurities that they don't frequently trade. Um,

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Speaker 1: you know, all the basically all the indicia of people

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Speaker 1: using insiderer information to try and get ahead of the market.

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Speaker 1: So it could have been detected in that way. It's

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Speaker 1: just not clear. So this fits in with pre barraras

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Speaker 1: insider trading gold medals, I guess because I can't think

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Speaker 1: of any other federal prosecutor who has as many insider

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Speaker 1: trading prosecutions to his name. That's right. Well, that seems

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Speaker 1: to have been a priority of his office since he

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Speaker 1: became U S Attorney back in the aftermath of the

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Speaker 1: financial crisis. Uh, you know, insider trading, of course did

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Speaker 1: not cause the financial crisis, but it is one of

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Speaker 1: the more easily prosecutable white collar crimes. Financial type crimes.

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Speaker 1: They're out there as opposed to you know, a fraud

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Speaker 1: or a market manipulation. So the office has done a

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Speaker 1: lot of those kinds of cases. Uh, they've more often

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Speaker 1: actually focused on the insiders, you know, the the you know,

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Speaker 1: members of boards of directors who are passing information to

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Speaker 1: hedge fund managers, you know, as we saw in some

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Speaker 1: of the some of the cases involving rajak Gupta and

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Speaker 1: raj rajaratnam Uh and others like it. But this is

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Speaker 1: sort of again sort of a new and different take.

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Speaker 1: Whereas you pointed out earlier on that this is not

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Speaker 1: these are not actually insiders. These are people thousands of

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Speaker 1: miles away with no apparent connection to anything, who are

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Speaker 1: gleaning inside information remotely. It really opens up a whole

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Speaker 1: new door to insider trading and perhaps we'll be seeing

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Speaker 1: more of these kinds of prosecutions. Thank you for joining

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Speaker 1: us on Bloomberg Law. That's Christian Berthelsen. He is Bloomberg

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Speaker 1: News Federal court reporter, and he wrote about this coming

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Speaker 1: up on Bloomberg Law. How pool client accounts at US

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Speaker 1: law firms create a loophole in international anti money laundering

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Speaker 1: safeguards and what lawyers should be doing about that. I'm

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Speaker 1: June Grass. This is Bloomberg