Securities Fraud and Money Laundering
In addition to the SEC lawsuit, on the same day, July 9, 2021, the U.S. Attorney for the Southern District of New York filed a Grand Jury Indictment against Trovias for Securities Fraud and Money Laundering. The SEC, in its Press Release concerning the case brought against Trovias, specifically notes with appreciation the assistance of the U.S. Attorney for the Southern District of New York, the Federal Bureau of Investigation, and the Internal Revenue Service. More about the FBI and the IRS later.
Trovias offered different payment options. A single tip could be purchased at the “promotional price” of $29.95. Or a person could subscribe on a weekly plan for $99.95, or a monthly plan for $299. Pre-release earnings reports sold for $5000 each. All payments had to be made in bitcoin. The Complaint states that the Dark Web “is a part of the internet that requires specially designed software to access and is specifically designed to facilitate anonymity by obscuring users’ identities, including by hiding users’ internet protocol addresses.” The Complaint further states that “the most prominent dark web is The Onion Report (“Tor”) network.”
The Indictment provides greater detail about the Dark Web. “The Dark Web refers to websites that are not indexed by conventional search engines and to which access may be restricted to those using specific anonymizing browsers or computer settings.” The Indictment asserts that Trovias used “online marketplaces [on the Dark Web] that enabled users to buy and sell illegal goods, including controlled substances, stolen and fraudulent identification documents and access devices, counterfeit goods, malware and other computer hacking tools, firearms, and toxic chemicals;” and in some cases, illegal services, such as insider tips and money laundering.
The Dark Web
We have written before about the use of the Dark Web in securities fraud, see our March 30, 2021, blog post, “Under the Cover of Darkness: Insider Trading and the Dark Web.”
When the average person thinks of the internet, their reference point is the Surface Web, which is indexed by conventional search engines like Google or Bing. However, the Surface Web, which most of us use every day, is less than 5% of the internet. Any activity in which you engage on the Surface Web can be – and most likely is – being tracked. Shopping for a tent and being indecisive regarding your purchase? It’s amazing how tent advertisements keep popping up while you are browsing.
Below the Surface Net, where daily legitimate personal and business interactions are conducted, lies the Deep Web, which sounds ominous but is really just the internet location for protected information such as medical records, bank accounts, government databases, and private emails, to name a few. Usually, without passwords or authorization, a person cannot access information stored on the Deep Web. The Deep Web accounts for approximately 96% of the internet. And it is within a small section of the Deep Web that the Dark Web exists.
The Dark Web is an intentionally hidden area of the internet – a dangerous neighborhood known for illegal activity and unsavory characters, where a person can buy and sell anything with total anonymity. Forget about using Google or Chrome to access this neighborhood – you need special software to gain access to the confines of this protected and uncensored space.
Ironically, the United States Government created the most commonly used software, known as Tor (“The Onion Router”), and released it to the public for free in 2004. Tor uses multiple layers of encryption (like an onion) to transmit information through indirect means to the ultimate destination, thereby preserving anonymity.
So the Complaint asserts that “Due to its dominant market share, the Tor network is home to the bulk of the Dark Web marketplaces.”
Insider Trading Tips
So, how then did the SEC and the U.S. Attorney happen onto the nefarious operations of this Greek interloper on the Dark Web? The first “mistake” occurred in June 2017, when Trovias sold a one-week plan to an undercover IRS agent on a Tor website. He subsequently sold him a monthly plan and requested that the IRS agent confirm that he was in the U.S. In correspondence with the IRS agent, Trovias confirmed that he was operating in the U.S. and obtained reports from his customer that the information was profitable. In April of 2018, a user of one of the Tor websites contacted Trovias about his posts to the website. That user was an undercover FBI agent. Trovias offered a monthly plan for $320, and the agent transferred that amount in bitcoin.
On May 1, 2018, Trovias began sending the agent daily insider tips, claiming that the information came from “money managers and a market maker.” The Complaint asserts that this statement was either false and misleading (because invented by Trovias) OR a violation of the law because Trovias knew that the statements were a violation of a duty of trust and confidence for personal benefit. The Complaint alleges that Trovias “provided tips to buy or sell particular stocks directly to the IRS Agent and the FBI Agent” from June 16, 2017, through at least March 6, 2020. Trovias essentially admitted his misdoing when he wrote to the FBI Agent on 18 May 2018 that his source “is really cautious of the information leaking to a lot of people.”
Over and apart from selling inside information to customers, Trovias publicly acknowledged to some of his customers that he was “working with quite a few people” to trade on their behalf in return for a percentage of the profits. He also wrote to the FBI agent on October 14, 2018, concerning some of his insider tips to say that he, Trovias, had traded in the shares of the same company about which he had tipped the agent four days earlier. Not content with his subscription receipts, he decided to participate in the market opportunities that his “inside information” presented.
Insider Tips on the Dark Web
The Complaint seeks a permanent injunction of Trovias’ activities and disgorgement of all his ill-gotten gains. The Indictment seeks conviction of the cited criminal offenses (one expects with incarceration) and forfeiture of all gains from his illegal activities. However, as the location of Trovias is not known (see the Complaint, last known address was in Greece), and he may be beyond the jurisdictional reach of U.S. law enforcement, the outcome for Trovias is uncertain. Even more troubling is the related apparent inability to determine the truth of Trovias’ claims as to the sources of the information he sold. If his claims as to how he received the trading information and his unexplained ability to obtain earnings releases BEFORE their release are not answered, the serious questions about the integrity of our capital markets will remain unaddressed.
When one is offered secret information for a price, one must ask what that says about the offeror, the offeree, and most of all, the marketplace. Here the answers remain shrouded in the blackness of the Dark Web.