Legal Alert

SEC and DOJ Target Insider Trading on the Dark Web

By David L. Axelrod, Henry E. Hockeimer, Izabella Babchinetskaya
March 19, 2021

The U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) brought actions against SpaceX engineer James Roland Jones for selling insider information on what’s known as the dark web.

On March 18, 2021, Mr. Jones pleaded guilty to conspiracy to commit securities fraud by selling material nonpublic information.

According to the SEC’s complaint, Mr. Jones lied about possessing material nonpublic information about a number of publicly traded companies and then sold this information, which he falsely claimed to be “insider tips” on various dark web marketplaces.

Traders purchased Mr. Jones’ fake insider information and then relied on it to purchase and sell stock of these publicly traded companies. The complaint alleges that Mr. Jones made approximately $27,000 as a result of his misrepresentations and deceptive acts, and he now faces up to five years in prison.

The dark web, which is well known for promulgating illegal activity under the guise of anonymity, has made it easier to transmit and sell material nonpublic information. For instance, the insider-trading forum that Mr. Jones accessed was designed with the goal of creating a “long-term and well-selected community of gentlemen who confidently exchange insider information about publicly traded companies,” according to the complaint.

Since companies began selling securities, they have faced the dangers of insider trading by company insiders. However, the anonymity of the dark web places companies at a heightened risk that insiders will use confidential information illegally, leading to potential reputational and other harms for the company.

Thus, it is increasingly difficult to safeguard and monitor sensitive information. This case, however, serves as an example that the SEC can and will pursue securities law violators, even if they only operate on the dark web.

Companies need to take proactive, prophylactic steps to help minimize the danger that company insiders will misuse access to material nonpublic information.

Ballard Spahr attorneys have helped companies craft compliance programs to help minimize these very risks and are skilled at assisting companies in the event that employees take advantage of access for their own benefit and to the detriment of the company.

Copyright © 2024 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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