Federal authorities charged three men on Thursday with taking part 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 fall 2021.
The arrests followed a lengthy investigation by federal prosecutors in Manhattan into trading in the securities of Digital World Acquisition Group, a so-called special purpose acquisition company. The inquiries focused on a small Miami-based venture capital firm, Rocket One Capital, led by Michael Shvartsman.
Federal prosecutors in Manhattan said they had charged Mr. Shvartsman and his brother Gerald, who owns an outdoor furnishing store in Miami, accusing them of improper trading. Also charged was Bruce Garelick, a former hedge fund manager who had worked at Rocket One. He, too, was a board member of Digital World before resigning last summer.
None of the individuals arrested are said to have any connection to Mr. Trump or anyone associated with Trump Media & Technology Company, the parent company of his right-leaning social media platform, Truth Social, said one person briefed on the matter, who spoke on the 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.
The authorities did not charge either company with wrongdoing.
The three arrested men appeared Thursday before a federal judge in Miami. An arraignment 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 to routinely refer 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 on the basis of nonpublic information about the deal. The authorities said the men had 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 Mr. Garelick was added as a board member to Digital World in July 2021 because of Mr. Shvartsman’s large investment in the SPAC before its initial public offering.
The investigation into improper trading in securities of Digital World is just one of several inquiries that have held up the merger with Trump Media. The clock is ticking on getting the deal completed before Sept. 8, the day Digital World would be required under its corporate charter to liquidate and return to current shareholders the $300 million it raised in its I.P.O.
The Securities and Exchange Commission has been investigating whether preliminary merger discussions between Digital World and Trump Media, which occurred before the SPAC went public in September 2021, had violated federal securities laws. The S.E.C., which also had been investigating the improper trading in Digital World securities, has not yet signed 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 before they go public. Federal authorities are trying to determine if Digital World’s talks with Trump Media were substantive enough that they should have been disclosed before the SPAC sold shares to the public.
The S.E.C. filed a related lawsuit on Thursday against the brothers and Mr. Garelick. The S.E.C. also named Rocket One as a defendant.
In its lawsuit, filed in federal court in Manhattan, the S.E.C. included a text message that Mr. Garelick sent to his daughter soon after being named to Digital World’s board. In the text, he said: “Wild possibility you might get a kick out of … your dad might be named to the ‘Trump Media Group’s Board of Directors.’”
Executives of Trump Media and some shareholders of Digital World have accused the S.E.C. of using the investigations as an excuse to run out the clock by not approving the merger. The deal is seen as critical in providing cash to Trump Media and Truth Social, which has emerged as the former president’s main megaphone over the past year.
Federal prosecutors and the S.E.C. filed several other insider-trading cases on Thursday, including charges against a former Pfizer employee and his friend for trading ahead of news about an encouraging test result in November 2021 for the pharmaceutical company’s Covid-19 drug, Paxlovid.
“Insider trading is not a quick buck. It’s not easy money. It’s not a sure thing. It’s cheating,” said Damian Williams, the U.S. attorney for the Southern District of New York, in a statement announcing the filing of cases.
