FEDS PURSUE NOVEL THEORY IN DARK WEB INSIDER TRADING CASE

Apostolos Trovias is a Greek national who sold insider trading tips and pre-released financial reports to investors seeking an inside edge. The only problem, under certain circumstances, selling non-public information over the dark web is a crime. And that’s why the IRS and FBI utilized special agents to take down and arrest this Greek national. But the feds pursued a novel theory here. Recognizing that the offense didn’t meet the statutory elements for insider trading they have elected to do what the feds have been doing for decades – expand a more vague statue to pursue a crime articulated in a more specific statute.

The Dark Web

The dark web isn’t really that dark, over 96% of the internet cannot be accessed by traditional users and a small fraction of this “private internet” is accessible through a browser called Tor, which is an encrypted browser that hides a person’s browsing data. Various marketplaces such as AlphaBay and Dream Market, enable users to buy and sell illegal goods such as drugs, access devices, counterfeit goods, malware, computer hacking tools, and other illicit goods. And now, insider trading tips. AlphaBay was shut down but between 2016 and 2019 it was fully operational and contained illegal goods appropriately categorized like eBay for ease of use. Trovias, nicknamed “the Bull” placed his “goods” under the section “Fraud > Other > Other” and informed customers that the stock tips could be purchased individually, weekly or on a monthly basis. The going rate for a monthly subscription was $329.95. He wasn’t terribly successful, selling only a few dozen individual tips and six subscriptions. He would also sell these tips directly to purchasers using encrypted messaging and email services and did this to two separate law enforcement agents.

But Trovias wasn’t the person who obtained the information. In fact, we really don’t have any details about where this information came from or that its actually “non-public”. Therein lies the problem with the prosecution’s case.

The Undercover Sting

To catch Trovias in the act, the Government had to obtain sufficient evidence that Trovias was selling non-public information. Given that all of his activities between customers were encrypted – they had to use an undercover sting operation to obtain “insider information”. So between 2018 and 2020 law enforcement agents from the FBI and IRS purchased “tips”, messaged back and forth with Trovias and ultimately transferred Bitcoin to blockchain addresses specified by Trovias in exchange for purported “insider information”. Trovias then used a debit card linked to one of his Bitcoin wallets to spend the funds on travel, entertainment, and lodging. While undercover officers were watching him, Trovias went one step further to design and build a website to facilitate the purchase and sale of alleged non-public information for use in stock trading through an auction site similar to prior dark web marketplaces.

The Charges

After the conclusion of the undercover investigation both the Southern District of New York and the SEC brought an insider trading case against Trovias for selling insider information on the dark web. The SEC also brought a civil action against Trovias seeking to obtain the proceeds of the purported scheme. The charges here pursue a novel theory. Generally an insider trading action is charged under Title 15 section 78j(b) which requires the government to prove that the holder of the information knew that the insider breached a duty to his or her employer in disclosing the information. But neither the SEC nor the DOJ know where the information was obtained from. So instead, Trovias was prosecuted under 18 U.S.C. 1348 which prohibits fraud in the connection with the purchase and sale of securities. Here, they argue a more novel theory, that despite the conduct failing to meet the elements of “insider trading” – a more broad statute can be used against Trovias. This theory has complications. Trovias only sold “information” not securities and was not connected with the actual purchase or sale of those securities. Moreover, “insider trading” is a statutory offense and can only come under the purview of “fraud” if the Court’s have expanded such a definition to include “insider trading”. Trovias is likely to raise a challenge to this case such as the challenge in Skilling v. United States where the Supreme Court determined that the mail fraud statute cannot be read so broadly to include the failure to provide “honest services”.

More updates to come as this case develops.