The Securities and Exchange Commission accused a California-based SpaceX engineer of providing “inside tips” on certain stocks to investors on the dark Internet and alleged that he falsely told investors that he had inside information. This is the SEC’s first enforcement action against suspected security violations on the internet.
In a parallel action, the The Justice Department also announced on Thursday James Roland Jones of Redondo Beach, California, pleaded guilty to insider trading and faced a maximum sentence of five years in prison.
According to the SEC complaintAs of 2016, Jones visited at least three different dark web marketplaces to facilitate the sale of illegal drugs, firearms, personally identifiable information, fraudulent ID, and malicious software and hacking tools.
The “dark web” is a subsection of the “deep web” that refers to anything on the Internet that is not indexed or accessible by a search engine. The dark web is an intentionally hidden part of the deep web where users must have certain software in place in order to access websites (and be able to do so anonymously). It is often the site of marketplaces for illegal activity.
While accessing the dark internet, Jones reportedly found an Insider Trading Forum (ITF) where users could exchange tangible, non-public information (MNPI) about publicly traded companies. In order to be able to access the forum, he had to prove to the moderators that he had access to such information. He tried to guess the earnings metrics for issuers in advance of their earnings releases in order to mislead the moderators that he had such information, but he suspected it wrong. He kept trying new online monikers and gained access to the forum after making a correct guess, but lost that access after failing to provide new and accurate projections.
“According to Jones, by no means was the information about the ITF very specific or particularly useful, and Jones claims he could not get a useful MNPI from the ITF,” the complaint said. “However, Jones realized that most people could not get access to the ITF and could therefore believe that the ITF contained actionable inside information. So Jones has developed a scheme to sell alleged insider tips to other people on the dark internet. “
In 2017, according to the complaint, Jones stated that he had “insider tips” on a marketplace. He claimed his tips were based on non-public information, assuming that if based on inside information, individuals would be more likely to pay for tips. Traders would pay Jones with Bitcoin and then, according to the complaint, make securities deals.
In addition, Jones created a separate dark web alias pretending to be an “inside” who could do business for others based on inside information (that was not there) and said he would share any profits with investors. But Jones didn’t even act, and instead paid back a small portion of what he had received as alleged returns to keep investors hooked.
“Jones’ false claims were material. The dark web marketplace users found Jones’ misrepresentations so significant that they could pay a fixed amount for tips or share their trading profits with Jones, ”the complaint read. “A reasonable investor would also find the fact that Jones did not actually provide MNPI to them as important in deciding whether to invest in the securities that were the subject of the alleged advice from Jones.”
The DOJ explained the related behavior, saying Jones used the nickname “MillionaireMike” to defraud investors by “buying personally identifiable information (” PII “) on the dark internet, including names, addresses, dates of birth and social security numbers” the information to conduct financial transactions. In April 2017, an undercover FBI agent gave Jones inside information for an unnamed public company, and Jones and an unnamed co-conspirator carried out a number of securities transactions based on the information, according to the DOJ.
Jones agreed to a forked settlement with the SEC that would permanently deter him from further violations, and reserves the option of disgorging and civil sanctions at a later date. A judgment date for his admission of guilt in the criminal proceedings has not yet been set.