July 6, 2023

SEC charges three potential SPAC investors, including a former board member, with insider trading

On June 29, 2023, the Securities and Exchange Commission charged Bruce Garelick, a former board member of Digital World Acquisition Corporation (“DWAC”); Michael Shvartsman and his firm Rocket One Capital LLC; and Michael’s brother Gerald Shvartsman for engaging in unlawful trades before DWAC announced publicly that it had agreed to acquire Trump Media & Technology Group Corp. (“TMTG”).  DWAC is special purpose acquisition company (“SPAC”) formed to raise money from the public for use in the acquisition of another company.  The SEC alleges that Garelick and both Shvartsman brothers were invited to invest in DWAC and, in June 2021, signed confidentiality agreements with DWAC and its sponsor that prohibited them from trading DWAC securities while in possession of material nonpublic information (“MNPI”).

According to the SEC’s complaint, which was filed in the US District Court for the Southern District of New York, Garelick was appointed to DWAC’s board of directors shortly after he signed the confidentiality agreement with DWAC.  While serving as a board member, Garelick obtained MNPI related to DWAC’s planned merger with TMTG and also voted on actions related to the merger.  According to the SEC, Garelick violated the duty of trust and confidence owed to DWAC through his signed confidentiality agreement and his fiduciary duty as a DWAC director, by purchasing additional DWAC securities on the open market before the merger agreement with TMTG was disclosed to the public.  He also allegedly failed to file SEC Forms 4 and 5 relating to his DWAC transactions, which he was allegedly required to file as a director.

Garelick, who was also employed at the time as the chief strategy officer for Rocket One, allegedly shared this MNPI with his employer Michael Shvartsman, who owns Rocket One.  Michael Shvartsman allegedly violated the duty of trust and confidence owed to DWAC under the confidentiality agreement and purchased DWAC securities based on Garelick’s tip.  The SEC further alleges that Michael Shvartsman placed the unlawful trades using a Rocket One account.  Michael also allegedly shared the tip with his brother, Gerald Shvartsman, who also purchased DWAC securities in violation of the duty he owed to DWAC under the confidentiality agreement.  Gerald Shvartsman also allegedly shared the MNPI with at least one of his employees and his father who also purchased DWAC securities based on the tip.  When the TMTG merger agreement was publicly announced in October 2021, the three defendants realized illicit profits totaling almost $23 million.

The SEC charged Garelick and both Shvartsman brothers with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.  Garelick was additionally charged with violating the reporting obligations of Section 16 of the Exchange Act and Rule 16a-3 thereunder.  The SEC is seeking permanent injunctive relief, disgorgement with prejudgment interest and civil monetary penalties against all defendants.  The SEC has also requested that the court permanently bar Garelick and Michael Shvartsman from acting as officers or directors of a registered company.

The US Attorney’s Office for the Southern District of New York also filed parallel criminal charges against the Garelick and the two Shvartsman brothers, which include charges of securities fraud and conspiracy.  They are currently scheduled to be arraigned on July 20, 2023.

SEC Press Release | SEC Complaint | USAO Press Release | USAO Indictment