Tiny Israeli Firm at Center of Stock Market Drama After Short-selling Surge

CTS reported that it had found flaws in Advanced Micro Devices microprocessors that made them vulnerable to hacks

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CTS Labs reports flaws in AMD microprocessors leave them vulnerable to cyber attacks.
CTS Labs reports flaws in AMD microprocessors leave them vulnerable to cyber attacks.Credit: REUTERS/Yi-ting Chung

Tel Aviv-based CTS Labs, a cyber security research firm with just six employees, found itself in the middle of a stock market drama on Tuesday after reporting that it had found flaws in Advanced Micro Devices microprocessors that made them vulnerable to hacks.

CTS executives told Reuters that they had shared their findings with some clients who pay the firm for proprietary research on vulnerabilities in computer hardware. They declined to identify their clients or say when they had provided them with data on the vulnerability. “I can’t really talk about my clients,” said Yaron Luk-Zilberman, chief financial officer at the firm that was founded in January 2017.

Short-seller Viceroy Research published a 25-page report on the vulnerabilities on Tuesday, betting AMD shares would fall. In fact, AMD shares traded heavily on Tuesday, but the stock closed up 1% to $11.64 after a day of volatile trade. It was trending lower early on Wednesday.

AMD said it was investigating the claims, but said the report took it by surprise. “This company [CTS] was previously unknown to AMD and we find it unusual for a security firm to publish its research to the press without providing a reasonable amount of time for the company to investigate and address its findings,” AMD said in a note to customers on its website.

Viceroy founder Fraser Perring told Reuters that somebody anonymously emailed him a draft of the report at about 4 P.M. on Monday. The firm spent much of the evening analyzing the situation and ended up taking a “sizeable” short position in AMD, he said.

There has been increased investor interest in AMD since the beginning of the month, with options drawing large trades that appeared to be betting on increased near-term gyrations in the shares. Puts (options contracts that protect against a drop in the share price) were particularly active. Last week, the cumulative number of open put contracts outnumbered open calls 1.5-to-1, the most defensive this measure has been in more than two years, according to options analytics firm Trade Alert data. That measure declined slightly by Tuesday. On Friday and Monday, short selling of AMD’s stock increased by about 15 million shares, according to S3 Partners, a financial analytics firm. That brought overall short interest in the chipmaker to about 180 million shares, the most since at least 2010.

“Over the last several days there was a spike in short selling that was completely out of the norm,” said Ihor Dusaniwsky, S3 Partners’ head of research.

New York-based cyber security firm Trail of Bits told Reuters that it had verified the findings from CTS, which paid $16,000 for a review of the AMD vulnerabilities.

A Trail of Bits analyst spent a week reviewing detailed technical reports from CTS, along with “proof of concept” code that could be used to launch attacks on computers running vulnerable AMD chips, Trail of Bits CEO Dan Guido told Reuters.

“These are real security issues in AMD code and processors” that hackers could exploit to manipulate or steal secure data, he said. For the attacks to work, an attacker must first obtain administrator access to a targeted network, Guido said.

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