Source: Fortune; Compiled by: Golden Finance
In mid-July, the stock price of cancer drug developer MEI Pharma soared. This wasn't because the small company, which first listed on the Nasdaq in 2003, had discovered a blockbuster cancer treatment. Instead, the surge was triggered by the company's decision to spend $100 million to purchase the cryptocurrency LTC as part of its asset management.
Unsurprisingly, the stock price surged from $3 to a high of $7. With the announcement of its LTC acquisition, MEI Pharma became the latest company to exploit a common stock manipulation tactic: when a publicly traded company adds a cryptocurrency to its balance sheet, traders respond by buying shares, driving the company’s value far above its acquisition cost.
Yet, unexpectedly, MEI Pharma’s share price nearly doubled in the days leading up to the announcement – despite no major updates being filed with the US SEC, no press releases being issued, and virtually no discussion on social media.
MEI Pharma isn't the only company to see unusual stock price increases before announcing its cryptocurrency buying strategy. Fortune has found similar patterns at other small, publicly traded companies, which, according to finance professors, investors, and CEOs, suggests that insiders were getting early access to some announcements.
"To me, this is indeed suspicious," said Xu Jiang, a professor at Duke University who studies insider trading in public markets. "From what I understand, this is the case with many insider trading cases." He added that without a thorough investigation, he couldn't be sure whether insider trading had occurred.
A MEI Pharma spokesman declined to comment.
Spokespeople for four other companies whose stock prices saw unusual swings before cryptocurrency purchases — Kindly MD, Empery Digital, Fundamental Global and 180 Life Sciences Corp — didn’t respond to requests for comment. Spokespeople for VivoPower and Sonnet BioTherapeutics, two other cryptocurrency asset managers whose stock prices saw similar fluctuations, also declined to comment.
News front-running trading
Stock price movements of eight digital asset treasury companies in the trading days leading up to their announcements of their transition to cryptocurrency businesses.
Crypto Treasury Boom
Treasury companies are one of the latest crazes in the cryptocurrency space, and billionaire Michael Saylor is a pioneer of the trend.
In 2020, Saylor, founder and chairman of Strategy (formerly MicroStrategy), announced that his data analytics software company would add Bitcoin to its balance sheet. Traders viewed the company's stock as a proxy for the world's largest cryptocurrency and bought its shares as its price rose.
The strategy has been so successful for Strategy that, despite generating just $115 million in revenue in the second quarter of this year, it has amassed nearly $70 billion worth of cryptocurrency, giving it a market capitalization of roughly $100 billion. (For comparison, Starbucks, a company with a similar market capitalization, generated $7.8 billion in revenue during the same period.)
Other companies have tried to replicate Strategy’s success. Early imitators included a Japanese budget hotel company, which began supporting Bitcoin in 2024, and several others. This year, the trend really took off. Since January, 184 public companies have announced cryptocurrency purchases, totaling nearly $132 billion, according to Architect Partners, a cryptocurrency M&A advisory and financing firm.
“We’ve reached a sort of saturation point,” said Louis Camhi, founder of RLH Capital, an investment management and advisory firm that has facilitated recent cryptocurrency treasury transactions. He said investors are now waiting to see whether their cryptocurrency treasury investments can be profitable.
"Information leakage"
However, some of those who have benefited from cryptocurrency-related price increases are not retail investors, but rather people with connections to companies or outsiders with access to private details who appear to have profited by front-running the news.
SharpLink, a sports betting and casino marketing company, saw its stock price dip below $3 in April and early May. But on May 27, when the company announced plans to add $425 million in Ethereum to its balance sheet, its stock price soared to a high of nearly $36.
Yet, in the three trading days leading up to the announcement, SharpLink's stock price more than doubled from $3 to $6, despite the company not having filed any documents with the SEC or issued a press release. "Word definitely leaked out because they were reaching so many investors that it was hard to control," said the CEO of another cryptocurrency treasury firm involved in the deal, declining to be named when discussing competitors.
A SharpLink spokesperson told Fortune after announcing its first ETH purchase on June 13 that the company has “policies and procedures in place to prevent” trading on insider information, but declined to provide further details.
Then there's Mill City Ventures, a small nonbank lender in Minnesota, which also showed signs of what financiers call "information leakage," when nonpublic information spreads beyond those within a company who are authorized to know about significant events.
In the two trading days before Mill City Ventures announced it had raised $450 million to become the Sui cryptocurrency treasury company, its stock price more than tripled, closing the week at nearly $6 – without the company announcing any major changes to its business.
“There was certainly some volatility in the stock leading up to the announcement,” said Stephen Mackintosh, a Mill City executive and general partner at Karatage, the hedge fund that led the financing. He later added: “We are very confident that the stock price volatility will not have an impact on the pricing of the transaction.”
Mill City Ventures is now SUI Group Holdings.
insider trading
There are clear regulations in the public markets regarding the release of “material non-public information” that could affect a company’s stock price.
Insiders with knowledge of significant events typically must agree to a "wall crossing," a term that refers to a transition from an outsider with no knowledge of stock movements to an insider with sensitive information. Companies often maintain a database of individuals who have been "wall crossed" to prevent regulators from investigating insider trading.
For cryptocurrency treasury companies, the deal can take months to complete, but just days before the announcement, brokers began what is known as a roadshow, where they reach out to investors to encourage them to put their money into the deal.
For example, according to Mackintosh, SharpLink executives pitched investors three days before announcing its cryptocurrency funding plan. Notably, the company's stock surged during those three days. Additionally, Mill City Ventures' stock surged during the two days that dealmakers pitched investors on its $450 million funding round.
Roadshow warm-up
Shares of SharpLink and Mill City Ventures both climbed as the dealmakers approached investors.
U.S. insider trading laws prohibit not only company executives from trading on information that could affect stock prices. Elisha Kobre, a partner at the law firm Sheppard Mullin and a former U.S. attorney for the Southern District of New York, said these laws also apply to others who receive information from those executives. This includes investors who receive briefings during roadshows.
In the case of cryptocurrency treasury companies, it's unclear who exactly profited from the front-running. According to SEC filings, while some executives at these companies filed notifications of stock grants or purchases before the cryptocurrency market turned, the vast majority of these companies haven't sold their holdings. More likely, insiders other than company directors or executives gained access to the information.
Still, the suspicious price fluctuations are consistent with what researchers have long observed in public markets. A 2014 study found that companies' stock prices rose an average of 7% in the 41 days before a merger announcement. While some of this price volatility could be attributed to traders accurately reading the market, researchers have found that it can also stem from traders using insider information to trade.
"Widely cited academic research shows that most illegal insider trading occurs before mergers and acquisitions," Peter Zielaki, a finance professor at Texas A&M University who studies insider trading, told Fortune. He cited a 1992 study that found that 80% of illegal insider trading cases prosecuted by the Securities and Exchange Commission were related to takeover bids.
“Every time you do a big M&A deal, this shit happens,” said a finance executive at a cryptocurrency treasury firm, who declined to be named discussing private business dealings. “And you always hear about the SEC questioning who knew what and when they knew it.”
Combating front-running transactions
In recent weeks, companies employing crypto treasury strategies have taken additional steps to prevent “information leaks.”
“It’s terrible for everyone,” Camhi, the RLH Capital founder, said of those who jump the gun with cryptocurrency treasury announcements. “So resolving this is good for everyone.”
Mackintosh, a partner at hedge fund Karatage, and his team learned of the alleged information breach at SharpLink and decided to contact investors within two trading days, rather than three. He added, "We're mindful of the current market volatility and we're trying to operate in the best and safest way possible."
Other companies are going further. Among them is CEA Industries, a small, publicly traded company focused on the Canadian e-cigarette market.
In late July, CEA Industries announced it had raised $500 million to become the treasury company for BNB, a cryptocurrency closely associated with the cryptocurrency exchange Binance. David Namdar, CEO of CEA Industries, said the dealmakers withheld the stock symbol from investors during the roadshow and only shared it with them after the market closed on Friday, July 25. CEA Industries, now known as BNB Network Company, wanted to "minimize the risk of information leaks or volatility" before announcing its cryptocurrency foray on Monday.
Just a week later, Verb Technology, a small, publicly traded company that developed a live-streaming platform called MARKET.live, followed a similar strategy. In early August, the company announced it had raised $558 million for TON, a cryptocurrency closely associated with the messaging app Telegram. An unnamed investor in the company said the dealmakers didn't reveal Verb's stock symbol until after the market closed on Friday evening. The investor, speaking about private business transactions, said
A company spokesman declined to comment.
Like CEA Industries, Verb's announcement came before the market opened on Monday, so potential front-runners can only buy the stock in pre-market trading.
Still, the stock jumped nearly 60% in the four hours leading up to the announcement.
