How will Musk get away with the allegations of Dogecoin market manipulation and insider trading?

The situation of the coin is not popular here. We should all know that Musk's association with Dogecoin began in 2020, when he posted multiple tweets on Twitter in support of Dogecoin. As the founder of Tesla and SpaceX and one of the richest people in the world, Musk's remarks have a huge influence on the market. He has publicly declared Dogecoin to be the "people's cryptocurrency" many times, and even said that SpaceX will "send Dogecoin to the moon", further pushing up the popularity and price of Dogecoin. In particular, in May 2021, Musk called Dogecoin a "hustle" on NBC's "Saturday Night Live" (SNL), which caused the price of Dogecoin to plummet by nearly 30% during the show.

Data shows that from 2020 to early 2021, the price of Dogecoin rose by more than 36,000%, from less than $0.01 to $0.73. Musk's tweets and public speeches acted as a catalyst in this process, and many investors flocked to the market in an attempt to profit from price fluctuations. However, Dogecoin's peak only lasted for a short time, and then experienced a sharp decline, with the price quickly falling back to 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 legal action against Musk, accusing him of using his influence on Twitter to manipulate the market, profiting from "pump and dump" behavior, and engaging in insider trading. Investors claimed that Musk and Tesla made huge profits by controlling multiple Dogecoin wallets and repeatedly selling Dogecoin at high prices. However, in August 2024, the United States District Court for the Southern District of New York dismissed the charges, and Judge Alvin Hellerstein stated that Musk's remarks were just "exaggerated propaganda" and did not constitute a legal basis for market manipulation or insider trading.

Aiying believes that this result is indeed a bit counterintuitive to many people, which is understandable. Now let me explain this logic to you.

I. Legal Definition 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 securities prices through deceptive means, causing investors to misjudge market conditions. Common market manipulation behaviors include false buying and selling, false reporting of trading volumes, or spreading false information to push up or down securities prices. The core of this behavior is that it deliberately misleads investors and undermines the transparency and fairness of the market.

Insider trading refers to the use of non-public information by certain individuals to trade securities and profit from it. According to Section 15 USC § 78t-1 of the Securities Exchange Act, insider trading usually involves company executives, shareholders or people with close ties to the company who trade by knowing the company's financial status or major events in advance. This behavior undermines the fairness of the market and violates the principle of information symmetry.

2. Why Musk’s tweets are not considered market manipulation

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

1. The court’s ruling: The tweet was “boasting”

Why did the court dismiss the lawsuit? Simply put, the judge believed that Musk's words about Dogecoin on Twitter were more like exaggerated "boasting" rather than real market manipulation. For example, he said that Dogecoin is "the future currency of the earth" or will "fly to the moon". Such words sound interesting, but no one will really operate it as a business plan. So the court classified these words as "puffery", that is, these remarks do not have the basis to be regarded as facts. In other words, Musk did not promise any specific market information, so it is not considered fraud.

This "exaggerated advertising" is very common in law. Many companies also say in their advertisements that their products are "the best" or "unique", but these words usually do not constitute deception because everyone knows that they are exaggerated statements.

2. Standards for reasonable investors

The court also pointed out that when determining whether it constitutes fraud, it is necessary to consider how "reasonable investors" would understand these statements. Reasonable investors mean people who have some experience and a basic understanding of the market. The court believes that ordinary people will not decide to invest a large amount of money to buy Dogecoin based on a few words from Musk on Twitter. After all, this market itself is volatile and risky, and investors should be aware of the risks and cannot blindly rely on the words of a public figure.

Especially in the cryptocurrency market, everyone knows that prices can fluctuate wildly at any time, not because of deliberate manipulation, but because the market is like this. Therefore, even if Musk's remarks did affect prices, the court still held that this did not meet the legal definition of market manipulation.

3. Investors can’t make decisions based on tweets alone

Another key point in the law is whether investors can rely solely on these tweets to make trading decisions. For securities fraud lawsuits, plaintiffs must prove that they made wrong investment decisions due to some false information and suffered losses as a result. However, in this case, the court held that Musk's remarks did not provide any substantive information, such as not clearly saying "Dogecoin will definitely rise to a certain amount." If investors rashly make transactions just because they see these remarks, it is difficult to legally determine that this is due to Musk's fraud.

This judgment also serves as a reminder to investors in the virtual currency market: the cryptocurrency market is highly emotional, and although comments on social media can affect prices, the ultimate responsibility lies with the investors themselves, and they cannot rely solely on the words of certain public figures to make investment decisions.

3. Cases involving market manipulation and insider trading by Web3 companies

• Conviction of Avraham Eisenberg : In 2024, this case became the first conviction of the U.S. Department of Justice for cryptocurrency market manipulation. Eisenberg manipulated the price of Mango Markets' futures contracts and MNGO tokens far above their actual value, then borrowed large amounts of cryptocurrency with no plan to repay. He was charged with wire fraud, commodities fraud, and market manipulation and could face up to 20 years in prison.

• Binance lawsuit (ongoing) : The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Binance and its CEO Changpeng Zhao, alleging unregistered securities offerings and other compliance violations. While some charges related to secondary market trading were dismissed, most of the charges are still ongoing. The case demonstrates the regulator's close attention to market manipulation that cryptocurrency exchanges may engage in.

• HEX Manipulation Case : A class action lawsuit against Binance.US and CoinMarketCap accused them of artificially limiting the HEX token’s ranking on CoinMarketCap, thereby influencing its price. The case was initially dismissed but was partially reinstated by a U.S. Court of Appeals in 2024, allowing the price manipulation allegations to proceed

How Web3 projects can avoid being characterized as market manipulation and insider trading

In the field of Web3 and cryptocurrency, project owners 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 crypto market, every action or statement of a project may trigger price fluctuations, leading to accusations of market manipulation or insider trading. In order to avoid these legal risks, Aiying recommends that Web3 practitioners take a series of compliance measures when promoting their projects.

1. Maintain transparent and accurate information disclosure

Whether it is project launch or promotion, transparency is the core of compliance. Project owners need to ensure that the information disclosed in white papers, technical roadmaps and marketing promotions is true, accurate and clear. Avoid exaggerating the potential of the project or making false promises. Over-hyping the prospects of the project can easily mislead investors and be regarded as manipulation 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 project development progress, disclose financial information, and respond to market questions in a timely manner.

2. Avoid posting potentially misleading social media comments

Social media is an important channel for promoting crypto projects, but you need to be extra careful when speaking on this public platform. Behaviors like Musk's, which influence market prices through Twitter, are very likely to lead to accusations of market manipulation. Although these charges were eventually dismissed, after all, the other party's legal team is very strong, and a slightly weaker team would not have to make things difficult for themselves.

Compliance recommendations :

• Clarify the role of project spokespersons and develop guidelines for them to release information to ensure that they only release verified information on social media and other public platforms.

• Avoid using vague or hype language to describe the future direction of the project, such as "about to skyrocket" or "changing the rules of the industry".

• Consider introducing a compliance team to review all external information, especially during market-sensitive periods such as before an ICO or major project updates.

  
  

3. Establish an internal transaction prevention and control mechanism

In order to prevent insider trading, Web3 projects need to establish a strict internal transaction prevention and control mechanism. Insider trading refers to certain individuals using undisclosed internal information to buy and sell assets in advance to obtain illegal benefits. Project insiders, especially team members who have access to undisclosed technical progress or cooperation agreements, may inadvertently fall into such trading behavior.

How to prevent insider trading :

• Establish an internal trading blacklist : set up a trading restriction window for project team members and core consultants, prohibiting them from buying and selling assets before and after the disclosure of certain important information.

• Signing a confidentiality agreement : Ensure that all project-related personnel sign a strict confidentiality agreement to prevent the leakage of internal information and impose legal liability on leaks.

• Automated transaction monitoring : Using the transparency of blockchain, large transactions can be monitored through smart contracts or third-party audit tools to detect abnormal transaction behavior in a timely manner.

Summarize

The cryptocurrency market is fundamentally 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 regulators (such as the Securities and Exchange Commission), and each company must disclose financial information regularly, and any important information that may affect the stock price needs to be disclosed in a timely manner. The cryptocurrency market is different. Its decentralization and globalization make regulation difficult. The price fluctuations of most cryptocurrencies are driven by market sentiment and speculation, and this instability is rare in traditional markets. In addition, the regulatory standards of 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 companies can only be self-disciplined in many cases, and leeks should not get too involved in this irregular game.