The so-called dark web is well-known as a marketplace for illicit activities such as drug dealing and arms sales.
Add insider trading to the list.
The Securities and Exchange Commission detailed the dark web’s use as a marketplace for insider trading tips in a complaint filed Thursday in an Indianapolis federal court against James Roland Jones, a SpaceX engineer it accused of accessing “an insider trading forum on the dark web in search of material non-public information (‘MNPI’) on which to trade securities.”
It was the first SEC enforcement action regarding illegal activity on the dark web.
Jones, who went by the moniker “MillionaireMike” on the dark web and lied about possessing MNPI in an effort to gain access to an insider trading forum, has pled guilty to both the SEC’s charges and federal criminal charges filed against him Thursday.
According to the related criminal charges, Jones purchased what he believed was inside information from an undercover FBI agent in 2017. Jones had purchased fake names, addresses, and social security numbers on the dark web to open accounts to trade on this information. Jones and a conspirator then “conducted numerous securities transactions based on this purported insider information,” according to a press release from the U.S. Attorney’s office in Tampa, Florida, announcing the plea agreement concurrently with the SEC.
Jones faces a maximum penalty of five years in prison.
In its complaint, the SEC did not name the dark web forum for insider trading, but the details it described match those of two exclusive forums, the KickAss marketplace and one called The Stock Insiders, both of which were exposed in a 2017 report “Monetizing the Insiders” by Red Owl and Intsights, two cyber security research firms.
The Stock Insiders, which opened in April 2016, was designed to “create a long-term and well-selected community of gentlemen who confidently exchange insider information about publicly traded companies” the report said. The exact same words were included in the SEC’s report regarding the forum Jones visited.
According to the SEC, Jones visited at least three dark web sites where illegal drugs, personal identifiable information, stolen and fraudulent identification documents, counterfeit goods, and malicious software and other hacking tools were sold.
In late 2016, the SEC alleged, he came across a dark web marketplace listing an address for an insider trading forum, where people could anonymously exchange MNPI about publicly traded companies.
The forum says its “main goal is to create ‘a long term and well-selected community of gentlemen who confidently exchange insider information about publicly traded companies,'” the SEC alleged. The forum’s rules added that “in the U.S. and many other countries insider trading is illegal and that the security and the anonymity of its members is the highest priority.”
Both statements were made on The Stock Insiders forum, according to the Red Owl/Intsights report, which noted that “the recruitment of insiders within the dark web is active and growing. We saw forum discussions and insider outreach nearly double from 2015 to 2016.”
In order to gain access to the forum and insider trading information, in the spring of 2017 Jones began offering to sell stock tips he claimed were the result of inside information, the SEC complaint said. “Jones knew that people would pay for what they believed to be MNPI, so he lied about the source of the information and his connection to the insider trading forum,” according to the complaint.
But instead of using inside information, Jones made educated guesses on corporate earnings based on his research. While his first two guesses were wrong, he was successful on the third try, estimating the earnings per share for a home building company. He said he got the information from a friend who worked there, which was a lie. When most of Jones’ tips did not pan out he was kicked out of the forum, according to the SEC.
Jones then gravitated to selling tips on the dark web by himself, the SEC said. Around that time, he was also attempting to buy MNPI from the FBI agent, according to the criminal complaint.
According to the SEC, several users paying in bitcoin purchased his tips and ultimately traded based on the information Jones provided. But his earnings were meager: Jones made approximately $27,000 as a result of his misrepresentations and deceptive acts, the SEC said.
“This case shows that the SEC can and will pursue securities law violators wherever they operate, even on the dark web,” said David Peavler, director of the SEC’s Fort Worth regional office. “We have committed staff and technology to pierce the cloak of anonymity these wrongdoers try to throw over their crimes.”
The current status of these insider trading forums is unclear. The KickAss marketplace appeared to have been seized by the government in early 2019, according to an Intsights report by Orin Mor, one of the authors of its original report. But he said the site had reappeared a week later “available through the same URL with the same home page layout and jabber contact as before. It appears that Kickass scammed its users by uploading a fake warning sign from the U.S ICE, making them think the forum was another victim of a site takedown executed by the authorities.”
According to a more recent report from dark web monitor Digital Shadows, KickAss returned last December after a lengthy hiatus, “following the increasing media and law enforcement attention brought to the platform by the actions of the randomware collective, The Dark Overlord.”