A "particularly abnormal" and potentially "improper" trading frenzy preceded the merger that created former president Donald Trump's new social media company, according to a report from the New York Times.
Digital World Acquisition, which merged with Trump's company to create a new social media platform, began allowing the trading of "warrants" before the deal was announced, the NYT reports. Warrants are contracts that give investors the right to buy shares of a stock at a predetermined price at a future date.
"About 350,000 warrants of Digital World traded in the first two days. But on the third day — Oct. 4, a week after Digital World and Trump Media & Technology Group entered into formal talks that were not disclosed at the time — trading in the warrants exploded. More than 2.5 million changed hands that day," the newspaper reports. "The surge was unusual, especially for a little-known SPAC that hadn’t publicly identified a merger target, experts said. And with the Financial Industry Regulatory Authority now scrutinizing the merger deal — particularly trading activity that took place before the companies announced their agreement on Oct. 20 — warrants could be under a microscope."
Erik Gordon, a law and business professor at the University of Michigan, told the NYT that regulators "may see something in the high volume of warrant trading that makes it wonder whether something improper drove the volume burst."
Mike Stegemoller, a finance professor at Baylor University, called the trading activity “particularly abnormal."
"That may not indicate any wrongdoing, he said, but the handful of high-volume days coupled with the early deal discussions 'are reason enough for FINRA to take a look,'" the NYT reported.