In 2010, computer hacker Andrew Auernheimer, under the alias ‘Weev’, was charged with stealing 114,000 email addresses by exploiting a flaw in AT&T’s security.
Auernheimer was convicted in 2012 and served 13 months of a 41-month sentence. Last Friday, however, a federal appeals court overturned his conviction on a technicality and he was released, reports CNBC.
Since his release, Auernheimer has already been working on his next hacking project. “I am starting a new fund, TRO LLC (yes, the troll corporation), based in generating actionable financial intelligence from the computer underground,” he told TechCrunch.
The business model is short equities, which means that the fund will profit when the value of a certain stock decreases. Michael del Castillo from Upstart Business Journal explains that Auernheimer’s fund could short a company’s stock after they find a security breach and then profit on their positions after that security weakness is revealed.
But how profitable is this strategy exactly? Using the recent Target security breach as an example, you can easily see how Auernheimer’s fund can be profitable.
On Dec. 18, 2013, news was released that malicious software had enabled hackers to steal credit card information from Target shoppers. The following morning, Target’s stock price opened up 2 percent lower while the broader market opened up unchanged.
Fast forward to February, Target’s stock price found itself around a 2-year low of $55. This reflects a 13 percent drop while the overall market moved only 3 percent to the downside. What this means is that we can attribute roughly 10 percent of the drop in Target’s stock price to the security breach.
Theoretically, if a hedge fund had discovered this breach first, they could have used options to synthetically create a leveraged short position in Target stock. Overnight, on a 2 percent down move in the stock price, such a short position could easily yield a 50 percent ROI pending option volatility.
In the past 6 months alone, we have seen numerous security breaches in addition to the Target security breach including the Heartbleed bug, the Adobe security breach and domino effect, Snowden and the NSA, etc. If this trend continues throughout this year and into 2015, Auernheimer’s fund could potentially hit a few home runs.
*Image of “hooded hacker” via Shutterstock