Three Chinese traders earned more than $ 4 million in illegal profits after hacking into the computer systems of two prominent U.S. law firms to obtain nonpublic information about merger and acquisition deals, according to a federal indictment unsealed Tuesday.
The allegations are the latest alarm bell for law firms, which have long been considered vulnerable to cyberattacks.
"Law firms are a virtual treasure trove for sensitive information that could be valuable," said John Reed Stark, a cybersecurity consultant and former Securities and Exchange Commission enforcement attorney who has advised law firms. "And traditionally they have some of the weakest cybersecurity regimes and infrastructure."
The traders bought shares of at least five publicly traded companies including pharmaceutical firms and chip makers before announcements that the firms would be acquired, according to an indictment from the Manhattan U.S. attorney's office.
The traders—who were identified as Iat Hong, Bo Zheng and Hung Chin—found out about the deals by gaining access to the email accounts of law-firm partners working on the transactions, according to the U.S. attorney's office. The trading occurred from April 2014 to late 2015, according to the indictment.
One of the traders, Mr. Hong, was arrested in Hong Kong on Sunday, prosecutors said. Law-enforcement officials are seeking to have him extradited to the U.S.
It wasn't immediately clear if the three traders had lawyers.
In one instance of the alleged deception detailed in court filings, the traders in 2015 bought stock in circuit manufacturer Altera Corp. after learning through emails from a law-firm partner that Intel Corp. was weighing an acquisition of the company. The defendants relied on confidential information to purchase Altera stock on more than two dozen occasions, prosecutors allege. When news of the pending merger broke in March 2015, Altera's stock price shot up by $ 9 a share, and the traders then sold their shares at a $ 1.4 million profit, according to the indictment.
Prosecutors didn't identify the law firms, but The Wall Street Journal reported in March that federal investigators were probing hacks of Cravath Swaine & Moore LLP and Weil Gotshal & Manges LLP, which represent Wall Street banks and Fortune 500 companies in everything from lawsuits to multibillion-dollar merger negotiations.
Five other law firms were also targeted, prosecutors allege, though hackers weren't able to access their networks. In total, prosecutors say the seven firms were targeted on more than 100,000 occasions.
Weil Gotshal represented Intel on its $ 16.7 billion acquisition of Altera, announced in June 2015. The indictment lists "Law Firm-1" as counsel to Intel on the deal. Representatives for Weil Gotshal didn't respond to requests for comment.
In another of the allegedly illegal trades, the defendants made $ 841,000 from buying and selling stock in e-commerce company Borderfree Inc., which was in the process of being acquired by Pitney Bowes Inc. The indictment lists "Law Firm-2" as counsel to Pitney Bowes. Cravath publicly announced in May 2015 that it was counsel to Pitney Bowes on its acquisition of Borderfree. A Cravath spokeswoman declined to comment.
The SEC filed a related civil lawsuit against the Chinese traders. The agency said the traders got access to the deals by installing malware on the law firms' computer networks, allowing them to download information from email accounts at the firms. Both law firms were infiltrated using unlawfully obtained credentials from law-firm employees, according to prosecutors.
Write to Sara Randazzo at sara.randazzo@wsj.com and Dave Michaels at dave.michaels@wsj.com
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