On Thursday, federal prosecutors arrested three investors on charges of insider trading in connection with a deal involving Digital World Acquisition Corporation's (DWAC) intended acquisition of Trump Media & Technology Group, the media venture of former President Donald Trump. The arrests signify an intensifying scrutiny of the controversial merger and shed light on how insider information can be exploited for substantial financial gain.

The trio, identified as Michael Shvartsman, Gerald Shvartsman, and Bruce Garelick, is accused of trading on confidential information related to DWAC's undisclosed plan to purchase Truth Social owner Trump Media & Technology Group in October 2021. According to the indictment, the three individuals capitalized on this insider knowledge to amass over $22 million.

Insider Trading Web Unravels

The indictment unveils an intricate web of insider trading wherein the defendants not only traded on nonpublic information but also allegedly relayed this sensitive information to friends, neighbors, and colleagues. These contacts, in turn, acquired securities in Digital World ahead of the public announcement regarding DWAC's deal with Trump Media. Following the announcement, the securities experienced a sharp increase in value, and the defendants, along with the individuals they had tipped off, sold their securities for a substantial profit.

Bruce Garelick's position as a director on Digital World’s board of directors is alleged to have granted him deeper access to DWAC's confidential merger plans with Trump Media. Prosecutors accuse Garelick of sharing what he characterized as “intelligence” regarding the merger negotiations and the timing of the public announcement with his co-defendants.

In total, those in the defendants’ circle purchased tens of thousands of securities in anticipation of the merger announcement. This insider ring was allegedly mobilized during a trip to Las Vegas, and involved Michael Shvartsman’s neighbors and Gerald Shvartsman’s employees at a furniture supply store.

SEC Files Civil Charges

In addition to the federal prosecution, the Securities and Exchange Commission (SEC) filed civil insider trading charges against the trio. Gurbir Grewal, director of the SEC’s Division of Enforcement, emphasized the SEC’s commitment in a statement saying, “Rather than adhere to his duty as an insider, we allege that Garelick, together with the Shvartsmans, monetized that information to generate over $20 million in illicit profits. This case demonstrates the [SEC’s] ongoing commitment to exposing insider trading wherever it occurs, including in SPAC mergers.”

Controversies Surrounding the Merger

While there is no allegation implicating Donald Trump in the insider trading, the charges add fuel to the fire surrounding the DWAC-Trump Media deal. This deal has been under the microscope, raising concerns among legal experts and attracting attention from regulators and prosecutors. Moreover, the Nasdaq stock exchange threatened to delist Digital World last month due to its failure to file a quarterly report, and nearly two years after the merger was initially announced, it has yet to be finalized.

All three defendants have surrendered to the authorities and were expected to make their initial appearance in a federal court in Miami on Thursday.

The case serves as a stark reminder of the importance of transparency and integrity in financial transactions, particularly involving prominent public figures and companies. It is likely to be closely watched by investors, regulators, and the general public as it unfolds.