643 F.Supp.3d 261
D. Mass.2022Background
- Indictment (Jan 2018–Sept 2020) alleges Klyushin (owner of Russian IT firm M-13) with co-conspirators Ermakov and Rumiantcev hacked two U.S. filing agents to steal material nonpublic information (MNPI) and traded on it ("hack-and-trade"); Avnet is a specific example (Jan 2020).
- Government alleges conspirators deployed malware, stole employee credentials, accessed filing-agent networks, downloaded earnings data, and executed parallel trades (including short positions) for profit.
- FBI obtained a September 29, 2020 Apple iCloud warrant and October 13, 2020 Apple/Google warrants based on affidavits by Special Agent Kang tying Irzak -> Ermakov -> Klyushin (Saxo trading records, WhatsApp contacts, calendar entries, account links).
- Apple produced extensive iCloud data; the government later sought and executed searches of a second Apple ID after discovering Klyushin’s phone association.
- Klyushin moved to dismiss Count IV (securities fraud) and part of Count I (conspiracy-to-commit-securities-fraud) and moved to suppress evidence seized under the Apple warrants; he also sought a Franks hearing challenging Kang’s affidavits.
- The court denied both the motion to dismiss and the motion to suppress and declined to hold a Franks hearing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether hacking to obtain MNPI and trading on it violates §10(b)/Rule 10b-5 | Government: hack-and-trade is deceptive conduct actionable under §10(b)/Rule 10b-5 | Klyushin: no fiduciary duty, so no securities fraud | Court: Denied dismissal — fraud can arise from deceptive outsider conduct without fiduciary duty (follows Dorozhko/Khalupsky) |
| Whether Count IV/part of Count I is legally deficient for failing to allege fiduciary duty | Government: fiduciary duty not required for hack-and-trade fraud theory | Klyushin: liability requires fiduciary duty (insider trading framework) | Court: Fiduciary duty not required; affirmative deception suffices; indictment adequate |
| Whether the Apple iCloud warrants lacked probable cause / nexus to Klyushin | Government: Kang’s affidavits and corroborating trading data, account links, communications, and Ermakov’s use of Klyushin’s account supplied a fair probability evidence would be in iCloud | Klyushin: affidavits are vague/contain unsupported assertions tying him to broad scheme (e.g., vague “traded in parallel” assertion) | Court: Probable cause existed; even if not, Leon good-faith exception applies |
| Whether a Franks hearing is warranted based on alleged omissions/misstatements in Kang’s affidavits | Government: prior criticisms of Kang (Rajaratnam) do not compel a hearing absent specific, material falsehoods or recklessness here | Klyushin: Kang’s prior criticized conduct and omission of that history render affidavits unreliable | Court: Denied — prior criticism alone insufficient; no substantial preliminary showing that falsehoods/omissions were material to probable cause |
Key Cases Cited
- S.E.C. v. Dorozhko, 574 F.3d 42 (2d Cir. 2009) (outsider hacking to obtain MNPI can be deceptive conduct under §10(b)/Rule 10b-5)
- United States v. Khalupsky, 5 F.4th 279 (2d Cir. 2021) (upholding securities-fraud theory for fraudulent trading by outsiders without fiduciary duty)
- United States v. Leon, 468 U.S. 897 (U.S. 1984) (good-faith exception to exclusionary rule for evidence obtained under magistrate-issued warrant)
- Franks v. Delaware, 438 U.S. 154 (U.S. 1978) (standards for requiring hearing on alleged material falsehoods/omissions in warrant affidavits)
- Illinois v. Gates, 462 U.S. 213 (U.S. 1983) (probable cause assessed by totality-of-circumstances; fair probability standard)
- United States v. Adams, 971 F.3d 22 (1st Cir. 2020) (nexus analysis for electronic-account searches)
- United States v. Levin, 874 F.3d 316 (1st Cir. 2017) (limits on good-faith exception where magistrate was misled or affidavit was so lacking in indicia of probable cause)
- United States v. Kuc, 737 F.3d 129 (1st Cir. 2013) (Fourth Amendment particularity and sufficiency of categories in search warrants)
- United States v. Aboshady, 951 F.3d 1 (1st Cir. 2020) (procedures for filtering large electronic productions and handling potentially privileged/irrelevant data)
- United States v. Ulbricht, 858 F.3d 71 (2d Cir. 2017) (digital seizures commonly expose irrelevant personal data; search protocols and review principles)