Source: Fortune
Translated by: Golden Finance
In mid-July, cancer drug developer MEI Pharma's stock price soared. This was not because the small company, which went public on Nasdaq in 2003, discovered a groundbreaking cancer therapy. Instead, the catalyst for MEI Pharma's stock price surge was the company's decision to spend $100 million to purchase cryptocurrency LTC as part of its assets.
The stock price soaring from $3 to a high of $7 is not surprising. After announcing the acquisition of LTC, MEI Pharma became the latest company to utilize common stock price manipulation tactics: when a public company adds cryptocurrency to its balance sheet, traders respond by buying stock, thus pushing the company's value far above the acquisition cost.
However, unexpectedly, MEI Pharma's stock price nearly doubled in the days leading up to the announcement—despite no significant updates submitted to the U.S. SEC, no press releases, and almost no discussion on social media.
MEI Pharma is not the only company whose stock price experienced unusual increases before announcing cryptocurrency purchase strategies. Fortune magazine found similar patterns in other small public companies, suggesting that insiders might have been privy to parts of the announcements, according to finance professors, investors, and business CEOs.
"In my view, this is indeed suspicious," said Xu Jiang, a professor at Duke University who studies insider trading in public markets. "As far as I know, many insider trading situations are like this." He added that he could not determine whether insider trading existed without a thorough investigation.
A spokesperson for MEI Pharma declined to comment.
Spokespersons for four other companies that experienced unusual volatility in stock prices before purchasing cryptocurrency—Kindly MD, Empery Digital, Fundamental Global, and 180 Life Sciences Corp—did not respond to requests for comment. Spokespersons for two other cryptocurrency asset management companies, VivoPower and Sonnet BioTherapeutics, with similar stock price fluctuations also declined to comment.
News front-running trading
The stock price trends of eight digital asset treasury companies before announcing their transition to cryptocurrency business.
Cryptocurrency treasury craze
Treasury companies are one of the latest crazes in the cryptocurrency sector, and billionaire Michael Saylor is a pioneer of this trend.
In 2020, Michael Saylor, founder and chairman of Strategy (formerly MicroStrategy), announced that his data analytics software company would incorporate Bitcoin into its balance sheet. Traders viewed the company’s stock as a proxy for the world’s largest cryptocurrency and bought its shares as the price of the largest cryptocurrency surged.
For Strategy, this strategy has been very successful; although its revenue for the second quarter was only $115 million, it accumulated nearly $70 billion in cryptocurrency with a market capitalization of about $100 billion. (In comparison, Starbucks had a revenue of $7.8 billion during the same period with a similar market cap.)
Other companies are also trying to replicate Strategy's success. Early imitators include a Japanese budget hotel company (which began supporting Bitcoin in 2024) and several other companies. This trend truly began to take off this year. According to data from cryptocurrency merger advisory and funding company Architect Partners, since January, 184 public companies have announced plans to purchase cryptocurrency, totaling nearly $132 billion.
"We have reached some sort of saturation point," said RLH Capital founder Louis Camhi. RLH Capital is an investment management and consulting firm that assisted with recent cryptocurrency treasury transactions. He stated that investors are now waiting to see if their cryptocurrency treasury investments will be profitable.
"Information leakage"
However, some of those benefiting from the rise in cryptocurrency-related prices are not retail investors but rather individuals connected to the company or external parties who obtained private details, seemingly profiting by front-running news reports.
SharpLink is a sports betting and casino marketing company whose stock price dropped below $3 in April and early May. However, on May 27, when the company announced plans to add $425 million in Ethereum to its balance sheet, its stock price soared to nearly $36.
However, in the three trading days leading up to the announcement, despite SharpLink not filing with the U.S. SEC or issuing press releases, its stock price more than doubled from $3 to $6. "There must have been some news leakage because they contacted too many investors, so it was hard to control," said the CEO of another cryptocurrency treasury company involved in the transaction, who refused to disclose his name when discussing competitors.
A spokesperson for SharpLink stated after completing its first ETH purchase on June 13 that the company has "established policies and procedures to prevent" trading based on insider information but declined to provide further details.
Then there is Mill City Ventures, a small non-bank lending institution in Minnesota, which also showed signs of what financiers call "information leakage", where non-public information spread beyond those within the company who had the authority to know about significant events.
In the two trading days before Mill City Ventures announced it raised $450 million to become a cryptocurrency Sui treasury company, its stock price more than doubled, closing that week at nearly $6—during which the company did not announce any significant business changes.
"There was definitely some volatility in the stock before the announcement," said a Mill City executive, the general partner at hedge fund Karatage that led the financing. He added, "We are very confident that the stock price fluctuations will not affect the deal's pricing."
Mill City Ventures has now been renamed SUI Group Holdings.
Insider trading
The public market has clear regulations regarding the release of 'significant non-public information' that may affect a company's stock price.
Insiders who receive significant event information usually have to agree to a 'wall crossed' treatment, a term that refers to becoming an insider with sensitive information from an outsider unaware of stock trends. Companies typically establish a database to record individuals who have been 'wall crossed' in case regulators intervene in insider trading investigations.
For cryptocurrency treasury companies, deals may take months to complete, but just days before the announcement, brokers began what is called a roadshow, broadly reaching out to investors and encouraging them to invest in the deal.
For example, according to Mackintosh, three days before SharpLink announced its cryptocurrency fund transformation plan, company executives were pitching the fund to investors. Notably, it was during these three days that the company's stock price soared. Additionally, during the two days when deal brokers pitched Mill City Ventures' $450 million financing, the stock price of this small non-bank lending institution also rose significantly.
Roadshow warm-up
As deal brokers contacted investors, the stock prices of both SharpLink and Mill City Ventures rose.
The U.S. insider trading law not only prohibits corporate executives from trading based on information that may affect stock prices. Elisha Kobre, a partner at Sheppard Mullin and former federal prosecutor for the Southern District of New York, stated that these laws also apply to others who obtain information from these executives. This includes investors who attend briefings during roadshows.
For cryptocurrency treasury companies, it remains unclear who exactly profited from the front-running trades. According to U.S. SEC documents, while some executives at these companies submitted notifications of stock gifts or purchases before shifting to the cryptocurrency market, the vast majority of companies had not sold their held stocks. More likely, besides company directors or executives, other insiders have received the information.
Nevertheless, these suspicious price movements align with what researchers have long found in the public market. A 2014 study found that within 41 days prior to a merger announcement, a company's stock price averaged a 7% increase. While some of the price movements may stem from traders accurately interpreting market conditions, researchers found that price fluctuations could also arise from traders using insider information to trade.
Peter Zilaki, a finance professor at Texas A&M University researching insider trading issues, told Fortune magazine: "Widely cited academic research shows that most illegal insider trading occurs prior to merger activity." He cited a 1992 study indicating that 80% of illegal insider trading cases brought by the U.S. SEC were related to takeover offers.
"This kind of bad thing happens every time a large merger deal is done," said a financial executive from a cryptocurrency treasury company, who refused to be named while discussing private business transactions. "And you always hear that the U.S. SEC asks those who knew what and when they knew it."
Crackdown on front-running trading
In recent weeks, companies adopting cryptocurrency treasury strategies have taken additional measures to prevent 'information leakage.'
"This is bad for everyone," said RLH Capital founder Camhi when talking about those who front-ran the cryptocurrency treasury announcements. "So solving this problem is beneficial for everyone."
Hedge fund Karatage partner Mackintosh and his team knew that SharpLink was suspected of information leakage, so they decided to reach out to investors within two trading days (instead of three). He added, "We noticed that the market is very active right now, and we are trying to operate in the best and safest way possible."
Other companies have gone further. This includes CEA Industries, a small public company focused on the Canadian e-cigarette market.
In late July, CEA Industries announced it had raised $500 million, becoming the treasury company for BNB. BNB is a cryptocurrency closely related to the cryptocurrency exchange Binance. CEA Industries CEO David Namdar stated that the deal brokers did not disclose its stock code during the roadshow but informed investors only after the market closed on Friday, July 25. CEA Industries has now been renamed BNB Network Company. He mentioned that the company aimed to "minimize the risk of information leakage or volatility" before announcing its entry into the cryptocurrency space on Monday.
Just a week later, Verb Technology, a small public company that developed a live streaming platform called MARKET.live, also adopted a similar strategy. In early August, the company announced it had raised $558 million to hold cryptocurrency TON, closely related to the instant messaging app Telegram. An investor, who wished to remain anonymous, stated that the deal brokers did not disclose Verb's stock code until after the market closed on Friday evening.
The company's spokesperson declined to comment.
Like CEA Industries, Verb's announcement was also made before the market opened on Monday, meaning potential front-runners could only buy the stock in pre-market trading.
Nevertheless, in the four hours leading up to the announcement, the stock still rose nearly 60%.
