By Jonathan Stempel and Helen Coster
NEW YORK (Reuters) -U.S. prosecutors on Thursday charged three Florida men with making more than $22 million through insider trading in late 2021 ahead of a proposed merger to take former U.S. President Donald Trump's social media company public.
Michael Shvartsman, his brother Gerald Shvartsman and Bruce Garelick allegedly traded illegally in Digital World Acquisition Corp (DWAC), a so-called special purpose acquisition company (SPAC), before it announced its plan to combine with Trump Media & Technology Group (TMTG). The merger has yet to occur.
Thursday's charges from the U.S. Department of Justice were announced by Damian Williams, the U.S. attorney in Manhattan. Neither Trump nor his company, which operates the Truth Social app, was charged.
DWAC did not immediately respond to requests for comment. Grant Smith, a lawyer for the defendants, declined to comment.
Michael Shvartsman led Rocket One Capital, a small Miami-based venture capital firm that employed Garelick as chief investment officer and placed all its trades in DWAC securities, court papers show. Gerald Shvartsman runs a furniture store.
Authorities said Garelick, who was also a DWAC director, provided the Shvartsmans with what he called "intelligence" about merger talks.
The defendants then allegedly began buying DWAC securities and passed tips to others, and sold their holdings within two days after the Oct. 20, 2021, merger announcement caused DWAC's share price to more than quadruple.
Each defendant faces five to seven fraud and conspiracy charges that could lead to decades in prison.
In a related civil lawsuit against the men, the U.S. Securities and Exchange Commission described several merger-related communications involving Garelick, including his suggesting that Michael Shvartsman buy more DWAC shares.
"FYI. I have a DWAC BOD meeting tomorrow at 12:30. I recommend starting to buy more DWACU stock," Garelick wrote on Sept. 20, 2021. "U" stands for units.
The SEC also said that on Oct. 15, 2021, five days before the merger announcement, a Rocket One employee emailed himself: "DWAC stock** BUY 10 unit gives you warrant and full share can't lose money.... bought 2m warrants b/c target is trump media."
According to the SEC, the defendants' sales resulted in illegal profit of about $18.3 million for Michael Shvartsman, $4.6 million for Gerald Shvartsman and $50,000 for Garelick.
The future of the DWAC-TMTG merger remains in doubt.
If it closes, Trump Media & Technology Group would gain access to more than $1 billion in cash from DWAC's institutional investors, such as hedge funds. According to a Feb 2, 2021 services agreement, Trump controls 90% of TMTG.
Late last year, shareholders approved extending the deadline to close the merger to September 2023.
The cases are U.S. v. Shvartsman et al, U.S. District Court, Southern District of New York, No. 23-00307; and SEC v Garelick et al in the same court, No. 23-05567.