How did Musk withdraw from the market manipulation and insider trading charges?
2025-01-17 15:21
We generally know that the association between Elon Musk and Dogecoin began in 2020 when he posted numerous tweets on Twitter in support of Dogecoin. As the founder of Tesla and SpaceX and one of the wealthiest people in the world, Musk's remarks have a huge impact on the market. He publicly declared several times that Dogecoin is "the people's cryptocurrency" and even said that SpaceX would "send Dogecoin to the moon," which further boosted the popularity and price of Dogecoin. Especially in May 2021, when Musk called Dogecoin a "hustle" on NBC's Saturday Night Live (SNL), the price of Dogecoin plummeted by nearly 30% during the show.

 

Data shows that from 2020 to early 2021, the price of Dogecoin increased by more than 36,000%, surging from less than $0.01 to $0.73. Musk's tweets and public statements served as a catalyst in this process. Many investors flocked to the market, trying to profit from the price fluctuations. However, Dogecoin's peak only lasted for a short time, after which it experienced a sharp decline, and the price quickly dropped back below $0.30, causing a large number of investors to suffer losses. Data shows that by the end of 2021, the price of Dogecoin had fallen by more than 70%.

 

With these fluctuations, investors filed a lawsuit against Musk, accusing him of manipulating the market using his influence on Twitter, profiting from "pump and dump" behavior, and engaging in insider trading. The investors claimed that Musk and Tesla, by controlling multiple Dogecoin wallets, repeatedly sold Dogecoin at high prices, reaping huge benefits. However, in August 2024, the United States District Court for the Southern District of New York dismissed these accusations. Judge Alvin Hellerstein said that Musk's remarks were merely "puffery" and did not constitute a legal basis for market manipulation or insider trading.

 

Aiying believes that this result may seem counterintuitive to many people, which is understandable. Now let me explain the logic to you in detail.
 

I. Legal Definitions of Market Manipulation and Insider Trading

Market manipulation and insider trading are clearly defined in securities laws. According to Section 10(b) of the U.S. Securities Exchange Act and its related Rule 10b - 5, market manipulation refers to influencing the price of securities through deceptive means, leading investors to misjudge the market situation. Common market manipulation behaviors include wash trading, inflating trading volumes, or spreading false information to drive up or down the price of securities. The core is that such behavior deliberately misleads investors and undermines the transparency and fairness of the market.

 

Insider trading refers to certain individuals using non - public material information to conduct securities transactions for profit. According to Section 15 U.S.C. § 78t - 1 of the Securities Exchange Act, insider trading usually involves corporate executives, shareholders, or those closely related to the company, who trade based on advance knowledge of the company's financial situation or major events. This behavior undermines the fairness of the market and violates the principle of information symmetry.
 

II. Why Musk's Tweets Don't Constitute Market Manipulation

Musk's Twitter activity is obvious to all, especially when it comes to talking about Dogecoin. A few of his words can trigger huge fluctuations in the entire market. However, from a legal perspective, the court ultimately ruled that he did not engage in market manipulation. The reason behind this is actually related to our understanding and standards of market manipulation.

1. The Court's Ruling: Tweets Are "Puffery"

Why did the court dismiss this lawsuit? Simply put, the judge believed that what Musk said about Dogecoin on Twitter was more like exaggerated "boasting" rather than actual market manipulation. For example, when he said that Dogecoin was "the future currency of the Earth" or would "fly to the moon," these statements might sound interesting, but no one would actually take them as a business plan. So the court classified these statements as "puffery," meaning that these remarks have no basis to be regarded as facts. In other words, Musk did not promise any specific market information, so it does not count as fraud.
 
This "puffery" is very common in law. Many companies say their products are "the best" or "unique" in advertisements, but these statements usually do not constitute deception because everyone knows they are exaggerated expressions.

2. The Standard of a Reasonable Investor

The court also pointed out that when determining whether fraud has occurred, it is necessary to consider how a "reasonable investor" would understand these remarks. A reasonable investor refers to someone with some experience and a basic understanding of the market. The court believed that an ordinary person would not decide to invest a large amount of money in Dogecoin just based on a few tweets from Musk. After all, the market is highly volatile and risky, and investors should be aware of these risks and not rely solely on the statements of a public figure.
 
Especially in the cryptocurrency market, everyone knows that prices can fluctuate wildly at any time. This is not because someone is deliberately manipulating it, but rather the nature of the market itself. Therefore, even though Musk's remarks did affect the price, the court still believed that this did not meet the legal definition of market manipulation.

3. Investors Cannot Rely Solely on Tweets to Make Decisions

Another key point in law is whether investors can make trading decisions solely based on these tweets. For a securities fraud lawsuit, the plaintiff must prove that they made a wrong investment decision due to certain false information and suffered losses as a result. But in this case, the court believed that Musk's remarks did not provide any substantive information, such as clearly stating that "Dogecoin will definitely rise to a certain price." If investors made hasty trading decisions just after seeing these remarks, it is difficult to legally prove that it was due to Musk's fraudulent behavior.
 
This ruling also serves as a reminder to investors in the virtual currency market: the cryptocurrency market is highly emotional. Although social media remarks can affect prices, the ultimate responsibility still lies with the investors themselves. One cannot rely entirely on the words of certain public figures to make investment decisions.

 

III. Cases Related to Market Manipulation and Insider Trading by Web3 Enterprises

  1. Conviction in the Avraham Eisenberg Case: In 2024, this case became the first cryptocurrency market manipulation conviction case by the U.S. Department of Justice. Eisenberg manipulated the futures contracts of Mango Markets and the price of the MNGO token, driving it far above its actual value. Then he borrowed a large amount of cryptocurrency with no repayment plan. He was charged with wire fraud, commodities fraud, and market manipulation and could face up to 20 years in prison.
  2. The Binance Lawsuit (Ongoing): The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Binance and its CEO, Changpeng Zhao, accusing them of issuing unregistered securities and other compliance violations. Although some of the charges related to secondary market trading were dismissed, most of the charges are still being processed. This case shows the close attention of regulatory authorities to possible market manipulation by cryptocurrency exchanges.
  3. The HEX Manipulation Case: A class - action lawsuit against Binance.US and CoinMarketCap accused them of artificially restricting the ranking of the HEX token on CoinMarketCap, thus affecting its price. The case was initially dismissed but was partially reinstated by the U.S. Court of Appeals in 2024, allowing the price - manipulation charges to proceed.

 

How Web3 Projects Can Avoid Being Classified as Market Manipulation and Insider Trading

In the Web3 and cryptocurrency fields, project parties face huge regulatory challenges in promotion and operation, especially in terms of market manipulation and insider trading. Due to the volatility and decentralization of the cryptocurrency market, every action or statement of a project has the potential to trigger price fluctuations, leading to accusations of market manipulation or insider trading. To avoid these legal risks, Aiying suggests that Web3 practitioners need to take a series of compliance measures when promoting projects.

1. Maintain Transparent and Accurate Information Disclosure

Transparency is the core of compliance, whether it is at the project launch or during promotion. Project parties need to ensure that the information disclosed in whitepapers, technology roadmaps, and market promotions is true, accurate, and clear. Avoid exaggerating the project's potential or making false promises. Over - hyping the project's prospects can easily mislead investors and be regarded as market - manipulation behavior by the market.
 
Ensure that all project information is strictly reviewed and consistent with the current project progress to prevent market turmoil caused by information asymmetry. For example, regularly update the project development progress, disclose financial information, and respond promptly to market doubts.

2. Avoid Posting Misleading Social Media Remarks

Social media is an important channel for promoting cryptocurrency projects, but speaking on this public platform requires extra caution. Behaviors like Musk's, which influence market prices through Twitter, are highly likely to trigger accusations of market manipulation. Although these accusations were ultimately dismissed, after all, his legal team is very powerful. A relatively weaker team doesn't need to bring such troubles upon themselves.
 
Compliance Suggestions:
  • Define the roles of project - party spokespersons clearly and develop guidelines for them to release information, ensuring that they only post verified news on social media and other public platforms.
  • Avoid using vague or hyped - up language to describe the project's future direction, such as avoiding expressions like "about to skyrocket" or "changing the industry rules."
  • Consider introducing a compliance team to review all externally released information, especially during market - sensitive periods, such as before ICOs or major project updates.

3. Establish an Internal Trading Prevention Mechanism

To prevent insider trading, Web3 projects need to establish a strict internal trading prevention mechanism. Insider trading refers to certain individuals using non - public internal information to buy or sell assets in advance for illegal profits. Project insiders, especially team members who have access to non - public technical progress or cooperation agreements, may inadvertently engage in such trading behaviors.

 

How to Prevent Insider Trading:
  • Set up an internal trading blacklist: Set trading restriction windows for project team members and core advisors, prohibiting them from buying or selling assets before and after the disclosure of certain important information.
  • Sign confidentiality agreements: Ensure that all project - related personnel sign strict confidentiality agreements to prevent the leakage of internal information and impose legal liability for information leakage.
  • Implement automated trading monitoring: Leverage the transparency advantage of blockchain to monitor large - volume transactions through smart contracts or third - party audit tools and promptly detect abnormal trading behaviors.

 

Summary

The cryptocurrency market is essentially very different from the traditional securities market, especially in terms of the regulation of market behavior and price fluctuations. The traditional securities market is strictly supervised by regulatory authorities (such as the Securities and Exchange Commission). Each company must disclose financial information regularly, and any important information that may affect the stock price needs to be made public in a timely manner. In contrast, the cryptocurrency market is different. Its decentralization and globalization make regulation difficult. Most cryptocurrency price fluctuations are driven by market sentiment and speculative behavior, and this instability is rarely seen in the traditional market. In addition, the regulatory standards for the virtual currency market are still evolving rapidly, and many countries have not yet established a complete legal framework for cryptocurrency transactions. Therefore, Aiying believes that in many cases, companies can only rely on self - discipline, and investors should not get too deeply involved in this irregular game.