Wednesday, March 13, 2013

Spam, “Pump and Dump” and Unauthorized Access

After a New Jersey federal jury convicted him of (i) one count of conspiracy in violation of 18 U.S. Code § 371 to further securities fraud by transmitting spam using false e-mail headers and using falsely registered e-mail addresses, (ii) one count of conspiracy in violation of 18 U.S. Code §371 to transmit spam by gaining unauthorized access to computers and using them to transmit spam and (iii) four counts of transmitting spam by gaining unauthorized access to computers and using them to transmit spam in violation of 18 U.S. Code § 1037(a), Christopher Rad filed a motion under Rule 29 of the Federal Rules of Criminal Procedure asking the judge to set aside the verdict and enter a judgment of acquittal. U.S. v. Rad, 2013 WL 178129 (U.S. District Court for the District of New Jersey 2013). 

According to this Press Release from the U.S. Attorney’s Office for the District of New Jersey, the charges against Rad arose from the following facts:

Stock promoters in a scheme to manipulate the price and volume of approximately 39 stocks . . . (the `Manipulated Stocks’), engaged Rad to generate a market for the stocks so they could dump them for a profit – a . . . `pump and dump’ scheme. . . .[that] began as early as May 2007 and continued through February 2009. After conspiring with the stock promoters, Rad . . . engaged `mailers,’ which . . . were actually `spammers.’ He sent the spammers the precise language to include in their spam campaigns.

The spammers included two individuals who distributed spam through botnets. . . . to promote the Manipulated Stocks. Infected computers included some in New Jersey, Europe, Russia and elsewhere.

The botnet . . . was controlled from command and control servers located overseas, including in Russia and China.  Rad, who went by the alias `billy_sack,’ communicated with the spammers by Skype, in most instances knowing them only by their aliases. . . .

Rad paid the spammers over $1.4 million during the twenty-two months of the conspiracy. The payments were made through e-Gold and money wires. Payments intended for a botnet operator in Russia were made through at least eight different countries. The wire instruction notations included false information such as payments for `Dell Monitors,’ `touch panels’ and `transportation services.’

Rad also agreed with others to engage in bad faith purchases of RSUV to create the impression the stock was active. This was done during the spam campaigns of RSUV so recipients of the spam would perceive active trading in the stock. . . .
Finally, Rad and his coconspirators put disclaimers in their mailings, but misrepresented the amount of stock that would be dumped into the market. In one instance, Rad and his coconspirators held more than 70% of the outstanding shares in a stock yet disclosed only that they held about 20%.

The investigation revealed that at the same time Rad was engaging spammers to facilitate his pump and dump scheme, hackers hacked into the brokerage accounts of third parties, liquidated the stocks in those accounts, and then used those accounts to purchase shares of some of the Manipulated Stocks. This created trading activity in the Manipulated Stocks and increased the volume of shares being traded, further creating an impression that the Manipulated Stocks were worth purchasing.

The federal district judge who has the case began his analysis of Rad’s Rule 29 motion by explaining that pursuant to the FederalRules of Criminal Procedure,

if a jury returns a guilty verdict against a defendant, a court may set aside that verdict and enter an acquittal. Rule 29(c). . . . In considering a motion for acquittal pursuant to Rule 29, the Court must `determine whether the evidence submitted at trial, “when viewed in the light most favorable to the government, would allow a rational trier of fact to convict.”’ U.S. v. Hart, 273 F.3d 363 (U.S. Court of Appeals for the 3d Circuit 2001) (quoting U.S. v. Helbling, 209 F.3d 226 (U.S. Court of Appeals for the 3rd Circuit 2000)).

The Court `must sustain the verdict if any trier of fact could have found the essential elements of the crime beyond a reasonable doubt.’ U.S. v. Basley, 357 Fed. Appx. 455 (U.S. Court of Appeals for the 3d Circuit 2009). . . . 

U.S. v. Rad, supra.

The judge also explained that Rad made three arguments in his Rule 29 motion:

(1) that it was error for the Court to not instruct the jury on the `fact issue [of] whether [Rad] believed his newsletter was being sent to recipients who had a relationship with the mailer by having opted into the newsletter relationship’ . . . ; (2) that there was insufficient evidence to support convictions premised on the unauthorized access of computers; and (3) that all of the Skype chat messages should have been suppressed pursuant to [Rad’s] initial Motion to Suppress. 

U.S. v. Rad, supra.

As to Rad’s first argument, the judge noted, initially, that he had

held earlier that [Rad]was not entitled to an instruction that the use of `opt-in’ lists with respect to the emails in question caused those emails to fall outside the scope of `commercial electronic mail messages.’ There was no evidence, contrary to [Rad’s] contentions, to suggest that these emails could be considered a relationship or transactional message under 15 U.S. Code § 7702. . .

U.S. v. Rad, supra.

This argument obviously goes to whether the emails qualified as “spam” under the federal statute that makes the transmission of spam a crime:  18 U.S. Code § 1037.  (Section 1037 of Title 18 of the U.S. Code codifies the CAN-SPAM Act of 2003.)

More precisely, § 1037 makes the transmission of “multiple commercial electronic mail messages” a federal crime.  18 U.S. Code § 1037(a)(1).  The term “commercial electronic mail messages” is defined in 15 U.S. Code § 7702(2), as follows:

(A) In general

The term `commercial electronic mail message’ means any electronic mail message the primary purpose of which is the commercial advertisement or promotion of a commercial product or service (including content on an Internet website operated for a commercial purpose).

(B) Transactional or relationship messages

The term `commercial electronic mail message: does not include a transactional or relationship message.

So Rad was trying to argue that the use of opt-in lists took the emails outside this definition, but the district court judge did not find this a basis for granting his motion for a judgment of acquittal:

The jury was properly instructed that one of the required elements of the spam-related charges is that the `electronic mail messages were commercial in nature’ and that `an electronic mail message is commercial in nature if its primary purpose is the commercial advertisement or promotion of a commercial product or service.’ . . . There is ample evidence of record to support the jury's finding that the relevant emails were commercial electronic mail messages. . . .

U.S. v. Rad, supra.

In his second argument, Rad claimed that

`the Government did not produce a single witness who claimed their protected computer was used without authorization’ and that the Government's expert `agreed that a system of controlled computers to send email in a legal fashion would operate identically and appear identical to a system using computers without authorization.’ . . .

While [Rad] is correct that the government did not elicit testimony from any witness whose computer was accessed without authorization (that is, a `botnet’ victim), there was evidence produced at trial from which the jury could find that the email campaigns relevant to Counts V through IX were sent though botnets. . . .

U.S. v. Rad, supra.

As noted above, Rad’s third argument was that the district court judge erred in not granting his motion to suppress certain evidence.  U.S. v. Rad, supra. The motion, which was filed before the trial began, noted that the prosecution obtained evidence including

computer equipment, electronic storage devices, and other evidence from a search of [Rad’s] house pursuant to a search warrant requested by FBI agent Suzanne Beck and Order signed by United States Magistrate Judge Andrew Austin February 24, 2009. The Government also obtained all of [Rad’s] personal and commercial email communications without sufficient probable cause.

U.S. v. Rad, supra.  Basically, Rad argued that the evidence, including the Skype chat messages noted above, should have been suppressed because the warrant was invalid. U.S. v. Rad, supra.  More precisely, Rad argued that the affidavit the federal agent submitted to establish probable cause for the search was

flawed in several ways. It relies on hearsay evidence which is not trustworthy, it fails to establish the veracity of the informer, it fails to show the basis of knowledge of the informer, it makes legal conclusions rather than provide evidence for them, and it omits crucial information or shows reckless disregard for the truth.

Defendant’s Response to United States’ Opposition to Motion to Suppress Evidence, U.S. v. Rad, supra, 2012 WL 7176972.

The judge declined to revisit the issue, noting that Rad’s

final argument is a renewal of a suppression motion that has been made and denied twice in this matter. [Rad] contends that certain Skype messages should have been excluded from evidence. To the extent that [he] now seeks that relief under Rule 29, his motion is improper. To the extent that [Rad] now asks the Court to reconsider its earlier rulings regarding suppression of the evidence, the motion is devoid of any basis for such relief.

U.S. v. Rad, supra.  

For these and other reasons, the judge denied Rad’s Rule 29 motion.  U.S. v. Rad, supra.  According to the Press Release cited above, sentencing is set for April 4, 2013.  It also notes that “[e]ach count of conviction carries a maximum potential penalty of five years in prison and a $250,000 fine or twice the gross gain or loss from the offense.”  U.S. v. Rad, supra.  

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