The dark web is frequently linked to the illicit drug trade. However, following what appears to be a world first prosecution by the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) in the USA, it is now clear that it also facilitates the exchange of material non-public information (“MNPI”) in respect of Publicly Listed Companies.
In 2016 and 2017, James Roland Jones, or as he was known on the dark web, “MillionaireMike” took part in the sale and exchange of purported “insider tips”. It was this conduct that led him to plead guilty to conspiracy to commit securities fraud last month. This article examines Mr Jones’ conduct and briefly considers how it may have been approached by a UK regulator.
While browsing the dark web Mr Jones discovered a website that advertised itself as an insider trading forum. In fact its stated main goal was to create “a long-term and well-selected community of gentlemen who confidently exchange insider information about publicly-traded companies”. To gain access to this “community of gentleman”, potential members were required to show that they possessed MNPI. The community moderators would decide if the MNPI was genuine, and if in their view it was, access would be granted.
The problem for Mr Jones was that he did not have access to any MNPI to share. As a result, he tried to gain access to the forum by lying to the moderators. His chosen method was to guess a material financial metric before an earnings announcement. If his guess was wrong, which it was on his first two attempts, he would create a new email account and try again. However, on his third attempt Mr Jones’ guess about the upcoming earnings per share of a homebuilding company was correct. He claimed that a friend of his at the company gave him the information and he was finally granted access to the forum.
As a condition of his membership, Mr Jones had to keep providing MNPI. However, as mentioned, he did not have access to any. So he ended up making another incorrect guess and was subsequently removed from the forum. However, while he was in the forum he found that it did not contain much, if any, actionable MNPI. This led Mr Jones to conceive of a scheme to sell purported “insider tips” to fellow dark web visitors. He realised that (a) most people would not be able to gain access to the forum; and (b) most people would believe it contained MNPI. As the SEC complaint notes:
In the spring of 2017, Jones listed “insider tips” for sale on one of the dark web marketplaces. Given that Jones did not have access to MNPI, his tips were merely guesses based upon Jones’s own research and speculation. Jones recognized that people would not pay him for his own stock tips, so he falsely described them as MNPI obtained from the ITF and/or corporate insiders.
As it happens, Mr Jones had some talent (or luck) as a stock analyst. In 2017, he offered an individual on the dark web a tip that resulted in a substantial payoff for both parties. As will now be obvious, the tip was not MNPI but the result of fundamental research into the overwhelming popularity of the target company’s products. Mr Jones received $20,000 in bitcoin for this purported MNPI.
If Mr Jones was in United Kingdom, would he have been charged with insider dealing by the FCA?
The obvious yet interesting point about the dark web and modern access to capital markets is that Mr Jones could have executed his scheme in respect of the same companies from London just as easily as he did from Indianapolis.
Insider dealing in the UK is prohibited by section 52 of the Criminal Justice Act 1993. It provides:
An individual who has information as an insider is guilty of insider dealing if, in the circumstances mentioned in subsection (3), he deals in securities that are price-affected securities in relation to the information.
Section 57 states that a person has information, as an insider, if and only if (a) it is inside information and they know that it is; and (b) they have it, and know they have it, from an inside source. Mr Jones’ conduct fails both limbs of the section 57 test. The information was publicly available and therefore not inside information, and he knew that. Nor did he have it from an inside source.
Is it otherwise illegal to do fundamental research on a company, call it MNPI, and sell it?
The SEC claim states:
Jones’s false claims were material. The dark web users found Jones’s misrepresentations significant enough to pay a fixed amount for the tips or to share their trading profits with Jones. A reasonable investor would also consider the fact that the Jones (sic) was not actually providing them with MNPI important in deciding whether to invest in the securities that were the subject of Jones’s purported tips.
The last sentence above merits re-reading. It appears that one of the SEC’s stated motivations and justifications for pursuing an individual who did not in fact sell non-public information was to protect the “reasonable investor” who would consider it important that they were not actually able to complete their attempted crime as the information they were buying on the dark web was fundamental research as opposed to MNPI.
All lawyers know that generally two elements need to be present before criminal liability arises. First, there needs to be a prohibited act, this is known as the “actus reus”. Second, there needs to be an intention to do the prohibited act, this is known as the “mens rea”. At first glance, it is arguable that neither actus reus nor mens rea are present in Mr Jones’ case. However, whether these elements are present depends on what Mr Jones is charged with.
It is clear Mr Jones misrepresented what he was selling. It is also clear he intended to do that. Drawing an analogy, it is akin to a drug dealer selling icing sugar while telling his customers it is cocaine. Such cases are unlikely to arise as the purchaser of the icing sugar (or MNPI) has a strong incentive not to complain to the Police (or the SEC/FCA). Nevertheless, that does not mean the “drug dealer” or Mr Jones is not culpable. For example, in the UK either party may meet the test for a charge of fraud by false representation pursuant to section 2 of the Fraud Act 2006 (or possibly section 3, fraud by failing to disclose information).
This case is striking for two reasons. First, how it was described by the DOJ in its press release runs counter to how insider trading is commonly thought of in securities markets (how can it be inside information when it is actually fundamental research?). Second, given the SEC has finite resources (like all regulators) it is interesting that they chose to pursue this conduct through to prosecution as it appears the main victim(s) of Mr Jones’ offending were those willing to engage in insider trading themselves (as opposed to being honest market participants).
It is important to note that Mr Jones’ case did not go to trial. He pleaded guilty. Had he advanced a defence at trial it is unclear what the outcome would have been. Nevertheless, the overarching lesson from this case may be that profiting from dishonesty will almost certainly be caught by some element of the law.
 Mr Jones has worked as an engineer for SpaceX. It is unclear if he still does.
 This is the umbrella offence that includes insider trading within it. It is the DOJ press release that describes Mr Jones as pleading guilty to “Insider Trading”; https://www.justice.gov/usao-mdfl/pr/spacex-engineer-pleads-guilty-insider-trading
 As defined by section 56 of the Criminal Justice Act 1993.
 As defined by section 57(2) of the Criminal Justice Act 1993.