It took a few years, but government crackdowns on “insider trading” involving digital assets have finally arrived. It’s about time! Insider trading occurs often in our securities markets, so it was only a matter of time before crypto and other digital assets would be exploited improperly by miscreants for financial gain.Powers On… is a monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an adjunct professor at Florida International University College of Law, where he teaches “Blockchain & the Law.”Back on June 1, the U.S. attorney for the Southern District of New York announced a criminal indictment against a former product manager of the OpenSea marketplace, Nathaniel Chastain. He is charged with using the confidential information about which nonfungible tokens were going to be featured on OpenSea’s homepage to buy them in advance of that event, and then sell them after they were featured. It is alleged that to conceal the fraud, Chastain conducted these purchases and sales using various digital wallets and accounts on the platform. He is charged with wire fraud and money laundering through making approximately 45 NFT purchases on 11 different occasions between June and September 2021, selling the NFTs for 2x to 5x his cost. There are a few interesting things to note about the indictment in United States v. Chastain. First, the criminal charges do not include securities fraud. Why? Because while there may be occasions when an NFT sale involves the sale of “investment contracts,” which are one kind of “security” under the federal securities law, it seems here that the NFTs in question did not fall under that categorization. Also, even if some of the NFTs might be “securities,” the U.S. attorney wisely found no need to tack on that added charge, given that wire fraud carries the same prison term. Wire fraud is also easier to prove.Second, the indictment does not indicate the amount of financial gain Chastain obtained from this purported scheme. Given this, I can only assume it was a relatively small dollar amount, probably less than $50,000.
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SEPTEMBER 2, 2022Third, while a bit esoteric, what happened here is not traditionally referred to as “insider trading,” as the U.S. characterizes it. To most securities lawyers, it is more like a “trading ahead” scheme. Insider trading generally involves the improper advance purchase or sale of a security. Here, the NFTs at issue do not appear to be “securities.”Finally, it is worth emphasizing that the Securities and Exchange Commission has not brought any complaint against Chastain for this conduct. This validates my thinking that the NFTs at issue in the scheme are not “securities,” as the SEC only has jurisdiction over conduct involving securities.More interesting is the insider trading case against Ishan Wahi; his brother, Nikhil Wahi; and his close friend, Sameer Ramani, in SEC v. Wahi, et al. On July 21, the SEC filed its complaint in the SDNY alleging that the three realized about $1.1 million in ill-gotten gains from their scheme, which ran from June 2021 through April 2022. It fell apart because of Coinbase’s compliance department, from which Ishan — a Coinbase employee — “misappropriated” confidential information about tokens to be listed on the exchange and traded on them in advance of listing announcements.