Digest Comment: Computer Crime and Financial Fraud: United States v. Van Dinh

The best way to see currency trading as trading in a security is to use “effects analysis” or a “stream of commerce” theory – to look at the effects the fraudulent trading in currency has on the currency market.  Effects analysis is allowed in the context of insider trading:^[xiii] the fraud of insider trading is considered to be the distortion of the market that results.^[xiv] Insider trading is prohibited in part because it affects investor confidence, essentially poisoning the stock market by undermining trust. In the context of currency trading, the arguments are that 1) fraudulent trading in currency affects the market for currency and securities generally and thus should be captured by the SEC (effects analysis); and 2) that the world is economically integrated. Thus, any trade in currency will almost inevitably occur, at some point in the stream of commerce, via an option, a put, a call, or a futures contract all of which are securities,^[xv] any of which is more than likely to be involved in the conversion of one currency into another (stream of commerce rationale). It is difficult to imagine an international wire exchange occurring with neither an option or future being directly touched or indirectly affected thereby which would bring the transaction into the ambit of the Securities and Exchange Acts. Thus the burden of proving that the currency transaction did not involve one of those forms of securities should be placed on the defendant who, after all, is in the best position to know the fraud they are accused of committing. Under that theory, the criminal could have been charged with violating Section 5 of the Securities and Exchange Act of 1933^[xvi] and section10b of the Securities and Exchange Act of 1934^[xvii] on a theory of market manipulation. Thus, for example, in Securities and Exchange Commission v. PrivateFX Global One Ltd., SA, 36 Holdings, Ltd., Robert D. Watson, and Daniel J. Petroski,^[xviii] - a case of internet fraud involving a currency trading computer program - the SEC has charged the defendants with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.^[xix] There however the cash was raised via a stock offering. The issue in United States v. Van Dinh may be moot. The defendant has already plead guilty as charged.^[xx] However, the fact pattern is theoretically interesting. Can currency trading be governed the SEC under an “effects analysis” or “stream of commerce” theory? There are also interesting procedural questions: would confession or conviction bar related wrongful acts from prosecution? Are purely financial crimes covered by double jeopardy?  Could the State amend its complaint or bring another proceeding? Would any of those moves be barred as “double jeopardy”:^[xxi] The double jeopardy clause of the 5th Amendment to the U.S. constitution holds “nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb”.^[xxii] Although, telecom abuse and violations of the securities law can be rationally distinguished from each other substantively speaking and thus are different offenses not subject to double jeopardy, the joinder theory holds that the defendant must be charged for all crimes from the same transaction at once.^[xxiii] So the alternative theories, even if admissible, would probably be barred in United States v. Van Dinh. Had the claims been alleged at the same time however, there would likely be no double jeopardy were the actions instituted at the same time. The fact pattern might make a great topic for a law review article – or a final exam. The points for practitioners to note here are that clever prosecutors can always find more than one way to skin the cat, and that clever hackers aren’t always so clever as they think.

---

^[i] Dr. Engle works at Harvard law school as a research aid to Duncan Kennedy and with the Harvard EU Law Association as well as an editor on the Harvard Human Rights Journal. He can be reached at erengle@law.harvard.edu 

^[ii] Kevin Poulsen, Former Teen Stock Swindler Pleads to New Hacking Charges, Wired.Com, October 7, 2009, http://www.wired.com/threatlevel/2009/10/dinh/ 

^[iii] 18 U.S.C. § 1030, Fraud and related activity in connection with computers, http://www.usdoj.gov/criminal/... 

^[iv] “’Phishing’ is a form of Internet fraud that aims to steal valuable information such as credit cards, social security numbers, user IDs and passwords.” New Zealand, Digital Strategy, http://www.digitalstrategy.govt.nz/Resources/Glossary-of-Key-Terms/ 

^[v] United States v. Van Dinh, Indictment, available at: http://www.wired.com/images_blogs/threatlevel/2009/10/dinh_complaint.pdf 

^[vi] Section 5 Securities and Exchange Act of 1933, Prohibitions Relating to Interstate Commerce and the Mails available at: http://www.law.uc.edu/CCL/33Act/sec5.html 

^[vii] SEA 1934 15 U.S.C. § 78j (1994) Manipulative and deceptive devices: “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange-- (a)(1) To effect a short sale, or to use or employ any stop-loss order in connection with the purchase or sale, of any security registered on a national securities exchange, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. http://www.law.cornell.edu/usc... 

^[viii] The Securities Act of 1933 defines “security” as: “Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a 'security', or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.” 15 U.S.C. 77b(1). The Securities Exchange Act of 1934 defines “security” as: “Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, or in general, any instrument commonly known as a 'security' or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to any purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.” 15 U.S.C. 78c(a)(10). 

^[ix] Reves v. Ernst & Young, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990). 

^[x] Sec. & Exch.Comm'n,v. Glenn W. Turner Enter., Inc., 474 F.2d 476; (9th Cir. 1973). 

^[xi] Prudential-Bache Securities, Inc. v. Cullather, 678 F. Supp. 601 (E.D. Va. 1987). 

^[xii] See, Securities And Exchange Commission V. Forex Asset Management, L.L.C., et al. Civil Action No. 3:99-CV-0256-P 

^[xiii] See, Asher v. Baxter Int'l, Inc. , 377 F.3d at 732.
^[xiv] Fink v. Ricoh Corp., 839 A.2d 942, 936 (N.J. Super. Ct. Law Div. 2003) 

^[xv] Section 3(a)(10) of the 1934 Act defines “security” to mean: any note, stock, treasury stock, security future, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited. 15 U.S.C. § 78c(a)(10). Section 2(1) of the Securities Act of 1933 (the “1933 Act”) contains a slightly different formulation. 15 U.S.C. § 77b(a)(1). The Supreme Court has instructed that the definitions of “security” in the 1934 Act and the 1933 Act “are virtually identical,” and the two “will be treated as such in ... decisions dealing with the scope of the term.” Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 n. 1, 105 S.Ct. 2297, 85 L.Ed.2d 692 (1985); see also Reves v. Ernst & Young, 494 U.S. 56, 61 n. 1, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990). 

^[xvi] Section 5 Securities and Exchange Act of 1933, Prohibitions Relating to Interstate Commerce and the Mails available at: http://www.law.uc.edu/CCL/33Act/sec5.html 

^[xvii] SEA 1934 15 U.S.C. § 78j (1994) Manipulative and deceptive devices: “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange-- (a)(1) To effect a short sale, or to use or employ any stop-loss order in connection with the purchase or sale, of any security registered on a national securities exchange, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 

^[xviii] Civil Action No. 09-CV-1541 U.S.D.C./Southern District of Texas (Houston Division). 

^[xix] See, Complaint, Securities and Exchange Commission v. PrivateFX Global One Ltd., SA, 36 Holdings, Ltd., Robert D. Watson, and Daniel J. Petroski, http://www.sec.gov/litigation/complaints/2009/comp21056.pdf 

^[xx] Kevin Poulsen, Former Teen Stock Swindler Pleads to New Hacking Charges, Wired.Com, October 7, 2009, http://www.wired.com/threatlevel/2009/10/dinh/ 

^[xxi] See, Cornell Legal Information Institute, Double Jeopardy, CRS Annotated Constitution http://www.law.cornell.edu/anncon/html/amdt5afrag2_user.html#amdt5a_hd7 

^[xxii] U.S. Const. Amendment V, available at: http://www.law.cornell.edu/anncon/html/amdt5afrag1_user.html#amdt5a_hd4 

^[xxiii] For an excellent synoptic discussion of double jeopardy double-talk see Double Jeopardy Law Made Simple, 106 YLJ 1807 (April, 1997) (arguing that federal double jeopardy does not apply at all to mere financial crimes).