Two Florida brothers pleaded guilty to securities fraud over their roles in a $23m insider-trading scheme when they traded on confidential information in 2021. The insider trading involved the planned merger between Donald Trump’s social media company and the special purpose vehicle that would take it public.
The men, Michael and Gerald Shvartsman, initially pleaded not guilty when they were charged with multiple counts of securities fraud last year. This happened alongside a third co-defendant who is scheduled to go to trial later this month.
However, each brother later pleaded guilty to one count of securities fraud in New York. According to federal prosecutors, the charge carries a maximum sentence of 20 years in prison. The two brothers were arrested in June 2023 and charged with illegally trading on nonpublic knowledge.
The Case
A shell company’s secret plan to buy Trump Media & Technology Group, the parent company of the struggling social network Truth Social, became public weeks after Michael Shvartsman was charged with an additional count of money laundering in a superseding indictment.
But he and his brother reached a deal with federal prosecutors. They agreed to plead guilty to one count of securities fraud and avoid trial in a federal district court in New York.
“Michael and Gerald Shvartsman admitted in court that they received confidential, inside information about an upcoming merger between DWAC and Trump Media,” Damian Williams, the US Attorney for the Southern District of New York, said. “They used that information to make profitable, but illegal, open-market trades.”
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The Company Shares Spikes
Shares of the shell company, Digital World Acquisition Corporation, spiked after the blank-check company publicly announced an agreement to merge with Trump Media. “Insider trading is cheating, plain and simple,” Williams said.
“And today’s convictions should remind anyone who may be tempted to corrupt the integrity of the stock market that it will earn them a ticket to prison.”
After years of legal and regulatory delays, the Trump Media merger finally closed, paving the way for the Truth Social owner to go public. Trump Media’s share price has surged, creating a financial windfall for the former president, the dominant shareholder.
He owns 78.8 million shares in Trump Media, a stake valued at about $4.1 billion. Trump Media’s (DJT) stock fell 4%. The frenzy on Wall Street began in October 2021 after Trump revealed plans to merge his new social media business with Digital World Acquisition Co., a special purpose acquisition company, or SPAC.
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How Did the Brothers Acquire the Securities?
According to prosecutors, the Shvartsman brothers and Garelick, then a director on Digital World’s board, tipped off friends and colleagues about the impending deal. They allowed them to buy securities in the SPAC before the Trump Media deal became public.
The defendants passed secret information about the impending deal to friends, Michael Shvartsman’s neighbors, and Gerald Shvartsman’s employees at a furniture supply store. The indictment did not allege that Trump knew of the alleged insider trading scheme.
Also, the brothers’ motivation to take plea deals could be the expansive nature of the evidence. According to pre-trial discovery filings, prosecutors in the US attorney’s office for the southern district of New York amassed the evidence.
The Allegations
The court filings comprehensively depicted the three men making millions from illegal trades. In September 2021, they were told that the blank-check company Digital World Acquisition had finalized plans to take Trump Media public, so they bought up warrants and units of Digital World at its opening low price.
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As a result, the men made substantial profits. They sold their stakes the following month after the share price skyrocketed upon the announcement.
The Trump Media Merger
The unusual circumstances of the Trump Media merger led to securities and criminal investigations in 2021. This delayed the merger and almost imperiled the entire public offering. Trump Media started running out of cash as it waited for the green light to make its stock market debut.
However, to help stave off insolvency in 2022, Trump Media accepted $8m in loans from an entity called ES Family Trust. According to reports, a Russian-American businessman named Anton Postolnikov manages the Trust. Postolnikov reportedly also came under scrutiny in the criminal investigation.
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