Federal authorities on Thursday charged three men with participating in a scheme to make $22 million in illegal profits by trading ahead of the proposed merger of former President Donald J. Trump’s social media company with a cash-rich public shell company in the fall of 2021.
The arrests came after a long-running investigation by federal prosecutors in Manhattan into trading in the securities of Digital World Acquisition Group, a so-called special acquisition company. The inquiries had focused on a small Miami-based venture capital firm, Rocket One Capital, headed by Michael Shvartsman.
Federal prosecutors in Manhattan said they were charging Mr. Shvartsman and his brother Gerald, who owns an outdoor furniture store in Miami, with improper trading. Also charged was Bruce Garelick, a former hedge fund manager who had worked at Rocket One. He was also a board member of Digital World before he resigned last summer.
None of the people arrested are said to have any connection to Trump or anyone associated with the Trump Media & Technology Company, the parent company of his right-wing social media platform, Truth Social, said a person briefed on the matter, who spoke on condition of anonymity because he was not authorized to speak publicly. Trump Media is supposed to merge with Digital World.
Grant Smith and Robert Buschel, lawyers for the brothers, declined to comment. Carl Schoeppl, a lawyer for Mr. Garelick, did not return a request for comment.
A Digital World executive declined to comment. A spokeswoman for Trump Media also did not respond to a request for comment.
Authorities did not charge either company with wrongdoing.
The three arrested men are scheduled to appear Thursday before a federal judge in Miami. A trial in federal court in Manhattan has not yet been set.
Rocket One and several people associated with Mr. Shvartsman had invested in Digital World about two months before the SPAC went public. Soon after the group invested, some employees at Rocket One began routinely referring to Digital World as the “Trump SPAC,” The New York Times previously reported.
Federal prosecutors in Manhattan said the three men had violated nondisclosure agreements not to discuss the pending deal with anyone or to buy additional securities based on nonpublic information about the deal. Authorities said the men also tipped off others about the impending deal between Digital World and Trump Media during a trip to Las Vegas and on other occasions.
In the indictment, prosecutors said Garelick was added as a Digital World board member in July 2021 because of Shvartsman’s large investment in the SPAC prior to the initial public offering.
The investigation into improper securities trading at Digital World is just one of several inquiries that have stalled the merger with Trump Media. The clock is ticking to get the deal done before Sept. 8, the day Digital World would be required by its company charter to liquidate and return to current shareholders the $300 million it raised in its IPO
The Securities and Exchange Commission has investigated whether preliminary merger discussions between Digital World and Trump Media, which took place before the SPAC went public in September 2021, had violated federal securities laws. The SEC, which had also been investigating improper trading of Digital World securities, has yet to sign off on the proposed merger.
SPACs, which are set up to raise money from investors and then find a company to buy, are not allowed to hold serious merger discussions until they go public. Federal authorities are trying to determine whether Digital World’s conversations with Trump Media were substantial enough that they should have been disclosed before the SPAC sold shares to the public.
The SEC filed a related lawsuit Thursday against the brothers and Mr. Garelick. The SEC also named Rocket One as a defendant.
In the lawsuit filed in federal court in Manhattan, the SEC included a text message Mr. Garelick sent to his daughter shortly after being named to Digital World’s board. In the text, he said: “Wild possibility that you can get a kick out of … your father being named to the ‘Trump Media Group Board of Directors’.”
Trump Media executives and some Digital World shareholders have accused the SEC of using the investigations as an excuse to run out the clock by not approving the merger. The deal is seen as critical to providing money to Trump Media and Truth Social, which have emerged as the former president’s main megaphone over the past year.
Federal prosecutors and the SEC filed several other insider-trading cases Thursday, including charges against a former Pfizer employee and his friend for trading ahead of news of an encouraging November 2021 test result for the pharmaceutical company’s Covid-19 drug, Paxlovid.
“Insider trading is not a quick buck. It’s not easy money. It is not certain. It’s cheating, Damian Williams, the U.S. attorney for the Southern District of New York, said in a statement announcing the filing of the cases.