Source: Fortune

Translation: Golden Finance

In mid-July, the stock price of cancer drug developer MEI Pharma soared. This was not because the small company, which first went public on NASDAQ in 2003, discovered a groundbreaking cancer therapy. Instead, the surge in MEI Pharma's stock price was triggered by the company's decision to spend $100 million to purchase the cryptocurrency LTC as part of its assets.

The stock price jumped from $3 to a peak of $7, which is not surprising. After announcing the acquisition of LTC, MEI Pharma became the latest company to utilize common stock price manipulation tactics: when a publicly traded company adds cryptocurrency to its balance sheet, traders respond by buying the stock, thereby pushing the company's value far above the acquisition cost.

However, unexpectedly, in the days leading up to the announcement, MEI Pharma's stock price nearly doubled—despite no significant updates submitted to the U.S. SEC, no press releases, and almost no discussion on social media.

MEI Pharma is not the only company to experience unusual stock price increases before announcing a cryptocurrency purchase strategy. Fortune found similar patterns in other small publicly traded companies, indicating that insiders may have had advance knowledge of some announcements, according to finance professors, investors, and corporate CEOs.

"In my view, this is indeed suspicious," said Xu Jiang, a professor at Duke University who studies insider trading in public markets. "As far as I know, many insider trading cases are like this." He added that he could not determine whether insider trading occurred without a thorough investigation.

A spokesperson for MEI Pharma declined to comment.

Spokespersons for four other companies—Kindly MD, Empery Digital, Fundamental Global, and 180 Life Sciences Corp—that experienced unusual stock price fluctuations before cryptocurrency purchases did not respond to requests for comment. Spokespersons for two other cryptocurrency asset management companies, VivoPower and Sonnet BioTherapeutics, which had similar stock price fluctuations, also declined to comment.

News Front-Running

Stock price trends of eight digital asset treasury companies in the days leading up to their announcements of transitioning to cryptocurrency businesses.

Cryptocurrency Treasury Craze

Treasury companies are one of the latest crazes in the cryptocurrency space, with billionaire Michael Saylor being a pioneer of this trend.

In 2020, Saylor, founder and chairman of Strategy (formerly MicroStrategy), announced that his data analytics software company would incorporate Bitcoin into its balance sheet. Traders viewed the company's stock as a proxy for the world's largest cryptocurrency and bought its shares as the price of the largest cryptocurrency rose.

This strategy has been very successful for Strategy, which, despite only generating $115 million in revenue in the second quarter of this year, has accumulated nearly $70 billion in cryptocurrency, with a market capitalization reaching about $100 billion. (In comparison, Starbucks, with a similar market cap, had revenue of $7.8 billion during the same period.)

Other companies have also attempted to replicate Strategy's success. Early imitators include a Japanese budget hotel company (which began supporting Bitcoin in 2024) and several other companies. This trend truly began to take off this year. According to data from cryptocurrency merger advisory and financing firm Architect Partners, 184 publicly traded companies have announced cryptocurrency purchases since January, totaling nearly $132 billion.

"We have reached some sort of saturation point," said Louis Camhi, founder of RLH Capital, an investment management and consulting firm that assisted with recent cryptocurrency treasury transactions. He noted that investors are now waiting to see if their cryptocurrency treasury investments can be profitable.

"Information Leakage"

However, some of those benefiting from the rise in cryptocurrency-related prices are not retail investors but individuals connected to the companies or external parties who obtained private information, seemingly profiting from front-running news reports.

SharpLink, a sports betting and casino marketing company, saw its stock price drop below $3 in April and early May. However, on May 27, when the company announced plans to add $425 million in Ethereum to its balance sheet, its stock price soared to nearly $36.

In the three trading days leading up to the announcement, despite SharpLink not filing any documents with the U.S. SEC or issuing a press release, its stock price more than doubled from $3 to $6. "There must have been some information leakage because they reached out to too many investors, making it hard to control," said the CEO of another cryptocurrency treasury company involved in the transaction, who declined to be named when discussing competitors.

A spokesperson for SharpLink stated after announcing the completion of its first ETH purchase on June 13 that the company has "established policies and procedures to prevent" trading on insider information but declined to provide further details.

Then there is Mill City Ventures, a small non-bank lending institution in Minnesota, which also showed signs of what financiers call "information leakage," where non-public information spreads beyond those within the company who are authorized to know about significant events.

In the two trading days before Mill City Ventures announced it was raising $450 million to become a cryptocurrency Sui treasury company, its stock price more than doubled, closing the week at nearly $6—during which the company did not announce any significant business changes.

"There was definitely some volatility in the stock before the announcement," said Stephen Mackintosh, an executive at Mill City and general partner at the hedge fund Karatage, which led the financing. He added, "We are very confident that the stock price volatility will not affect the transaction pricing."

Mill City Ventures has since been renamed SUI Group Holdings.

Insider Trading

There are clear regulations in the public market regarding the release of "material non-public information" that could affect a company's stock price.

Insiders who receive information about significant events typically must agree to "wall crossing," a term that refers to the transition from being an outsider unaware of stock movements to becoming an insider with access to sensitive information. Companies usually establish a database to record individuals who have been "wall crossed" in case regulatory agencies intervene to investigate insider trading.

For cryptocurrency treasury companies, transactions may take months to complete, but just days before the announcement, brokers begin what is known as a roadshow, widely reaching out to investors to encourage them to invest in the transaction.

For example, according to Mackintosh, in the three days before SharpLink announced its cryptocurrency fund transformation plan, company executives pitched the fund to investors. Notably, it was during these three days that the company's stock price surged. Additionally, during the two days that transaction facilitators pitched Mill City Ventures' $450 million financing to investors, the stock price of the small non-bank lending institution also rose significantly.

Roadshow Warm-Up

As transaction facilitators engage with investors, both SharpLink and Mill City Ventures saw their stock prices rise.

U.S. insider trading laws not only prohibit company executives from trading on information that may affect stock prices. Elisha Kobre, a partner at Sheppard Mullin law firm and former federal prosecutor for the Southern District of New York, stated that these laws also apply to others who obtain information from these executives, including investors who listen to briefings during roadshows.

In the case of cryptocurrency treasury companies, it remains unclear who exactly profited from the front-running trades. According to U.S. SEC filings, while some executives of these companies submitted notices of stock gifts or purchases before the shift to the cryptocurrency market, the vast majority of companies have not sold their held shares. It is more likely that, in addition to company directors or executives, other insiders also received the information.

Nevertheless, this suspicious price volatility aligns with findings researchers have long observed in public markets. A 2014 study found that, on average, stock prices rose by 7% in the 41 days leading up to a merger announcement. While some price fluctuations may stem from traders accurately interpreting market conditions, researchers found that price movements could also result from traders using insider information.

Peter Zilaki, a finance professor at Texas A&M University who studies insider trading issues, told Fortune, "Widely cited academic research indicates that most illegal insider trading occurs before merger activity." He cited a 1992 study that noted 80% of illegal insider trading cases brought by the SEC were related to acquisition offers.

"Every time a large merger deal is made, this kind of bad thing happens," said a financial executive involved with a cryptocurrency treasury company, who declined to be named when discussing private business transactions. "And you always hear that the SEC will inquire about who knew what and when they knew it."

Crackdown on Front-Running

In recent weeks, companies adopting cryptocurrency treasury strategies have taken additional measures to prevent "information leakage."

"This is bad for everyone," said Camhi, founder of RLH Capital, when discussing those who front-run cryptocurrency treasury announcements. "So addressing this issue benefits everyone."

Hedge fund Karatage partner Mackintosh and his team were aware of SharpLink's potential information leakage, so they decided to contact investors within two trading days (instead of three). He added, "We noticed that the market is very active right now, and we are doing our best to operate in the best and safest way."

Other companies have gone even further. This includes CEA Industries, a small publicly traded company focused on the Canadian e-cigarette market.

In late July, CEA Industries announced it had raised $500 million to become a treasury company for BNB, a cryptocurrency closely associated with the cryptocurrency exchange Binance. CEA Industries CEO David Namdar stated that the transaction facilitators did not disclose its stock ticker during the roadshow, but informed investors only after the market closed on Friday, July 25. CEA Industries has since been renamed BNB Network Company. He mentioned that the company aimed to "minimize the risk of information leakage or volatility" before announcing its entry into the cryptocurrency space on Monday.

Just a week later, Verb Technology, a small publicly traded company that developed a live streaming platform called MARKET.live, adopted a similar strategy. In early August, the company announced it had raised $558 million to hold cryptocurrency TON, which is closely related to the instant messaging app Telegram. An investor from the company, who wished to remain anonymous, stated that the transaction facilitators did not reveal Verb's stock ticker until after the market closed on Friday evening.

The company's spokesperson declined to comment.

Like CEA Industries, Verb's announcement was also made before the market opened on Monday, allowing potential front-runners to buy the stock only in pre-market trading.

Nevertheless, within four hours before the announcement, the stock still rose by nearly 60%.

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