Amidst the government’s ongoing efforts to combat insider trading, a recent dismissal of criminal charges for insider trading gives new insight into this constantly evolving area of law. A federal judge recently dismissed criminal charges against eight social media influencers who allegedly ran a $100 million pump-and-dump scheme through their social media accounts.¹ In December 2022, both the Securities and Exchange Commission (“SEC”) and the Department of Justice (“DOJ”) brought charges against the influencers for allegedly manipulating the market through coordinated misrepresentations and omissions to their thousands of followers on Twitter and Discord (an instant-messaging social platform). Specifically, the SEC charged the influencers with civil securities fraud under both the Securities Exchange Act of 1934 and the Securities Act of 1933, while the DOJ charged them with criminal securities fraud and conspiracy to commit securities fraud. At the request of the DOJ, the SEC agreed to pause its proceedings so the criminal case could be litigated first.

The Constantinescu Case and its Building Blocks

On March 20, 2024, the United States District Court for the Southern District of Texas, Houston Division (“SDTX”), dismissed the criminal charges levied by the DOJ against all eight defendant influencers. The DOJ had alleged that the influencers engaged (and conspired to engage) in a scheme to maximize their profits via the purchase and sale of certain securities at the expense of their followers by posting false and misleading information and also failing to post other important information on their social media accounts. Essentially, the DOJ alleges the influencers participated in a pump-and-dump scheme by using their followers to artificially increase the price of those securities before secretly selling their own shares. In dismissing the charges, the SDTX applied two recent cases, Ciminelli v. United States² and United States v. Greenlaw.³

In Ciminelli, the Supreme Court rejected a previously adopted theory of fraud known as the “right to control.” Notably this theory had previously only been applied to wire fraud, however, this did not prevent the SDTX from applying the same framework to securities fraud.⁴ Under the “right to control” theory, the government could prove that defendants engaged in a “scheme to defraud” victims of “money or property” by showing, among other factors, that the scheme “denies the victim the right to control its assets by depriving it of information necessary to make discretionary economic decisions.”⁵ But the Supreme Court rejected this theory in Ciminelli, holding that “the so-called ‘right to control’ is not an interest that had ‘long been recognized as property’ when the wire fraud statute was enacted.”⁶ Furthermore, the Court held the federal fraud statutes are “limited in scope to the protection of property rights.”⁷ Through its ruling, the Court limited the scope of the wire fraud statute to only apply to schemes that harm a victim’s traditional property right, and not to those that aim to harm a victim’s right to have accurate information.

SDTX also applied Greenlaw, a Fifth Circuit decision holding that the criminal securities fraud statute requires a specific “intent to defraud” and not only a “scheme to defraud.” The court defined “intent to defraud” as requiring both an intent to deceive and an intent to cause some harm to result from that deceit. Specifically, the second prong was defined as an intent to cheat, meaning “to deprive the victim of money or property by means of deception.”⁸ Moreover, the court suggested that a “scheme to defraud” requires depriving another of money or property and bringing about some financial gain to the defendant.⁹

Applying Ciminelli and Greenlaw to Our Social Media Influencers

Back to Constantinescu, SDTX applied Ciminelli and Greenlaw to find that the DOJ had failed to plead that the influencers had engaged in a “scheme to defraud.” While the court found that the allegations sufficiently asserted that obtaining financial gain was the object of the influencers scheme, the DOJ’s complaint failed to explain how the influencers harmed the victim’s traditional property rights.¹⁰ Specifically, the court found that the property right of the investors, harmed by the influencers, was their right to control their assets, or stated another way, was their right to make an informed discretionary decision.¹¹ Thus, the court held that even taking all of the allegations as true, the DOJ failed to state a crime under 18 U.S.C. § 1348 and 2, and 18 U.S.C. § 1349 as interpreted by Ciminelli.¹² The final result of the Constantinescu case remains to be seen, as the court granted the influencers’ motion to dismiss without prejudice, leaving room for the DOJ to replead.¹³ However, given the court’s interpretation and application of Ciminelli and Greenlaw, it may be difficult for the DOJ to plead their case.

Takeaways

Insider trading remains a clear focus of both the SEC and DOJ. In Constantinescu, the SDTX court found that the government must meet a higher standard when pleading fraud, including wire fraud which is often used by the DOJ in cases of securities fraud. It will be interesting to see if other courts follow suit. Moreover, in light of the dismissal, and the potential increased difficulty in pleading criminal securities fraud for the DOJ, the SEC may be less likely to stay its investigations while the DOJ proceeds. As always, we recommend that in-house counsel and compliance professionals consult with attorneys to stay up to date on the latest in this constantly evolving space.

¹United States v. Constantinescu, No. 4:22-cr-00612, 2024 WL 1221579, at *5 (S.D. Tex. Mar. 20, 2024).
²Ciminelli v. United States, 598 U.S. 306 (2023).
³United States v. Greenlaw, 84 F.4th 325, 350 (5th Cir. 2023).
⁴In Greenlaw, the Fifth Circuit noted that a district court’s analysis of the securities fraud statute under Title 18 should be guided by caselaw on the mail and wire fraud statutes under Title 18. Greenlaw, 84 F.4th at 399 n.4.
⁵United States v. Binday, 804 F.3d 558, 570 (2d Cir. 2015).
⁶Ciminelli, 598 U.S. at 313.
⁷Id. at 314.
⁸Greenlaw, 84 F.4th at 351.
⁹Id. at 349.
¹⁰Constantinescu, No. WL 1221579, at *5.
¹¹Id.
¹²Id. at *6.
¹³Id.