The Wheels Are In Motion(s) In The First NFT Insider Trading Case
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In late May of this year, the United States Department of Justice indicted and arrested Nathaniel Chastain, a former OpenSea employee, charging Mr. Chastain with wire fraud and money laundering in connection with what the government alleges to be the first ever NFT-centered insider trading scheme. As explained in the unsealed indictment, part of Mr. Chastain's duties as a product manager at OpenSea, the largest online marketplace for NFTs, entailed choosing which NFTs to highlight on the homepage of OpenSea's website. Typically, the price of an NFT significantly increases after it is featured on OpenSea's homepage. Mr. Chastain is alleged to have "exploited his advanced knowledge of what NFTs would be featured on OpenSea's homepage for his personal financial gain" by quietly purchasing dozens of soon-to-be-featured NFTs and selling them at a significant profit after they were published on OpenSea's homepage.
Over the past seven weeks, a flurry of motions have been filed by Mr. Chastain's defense team. This article provides a brief overview of the relief sought in these motions and highlights some of the key arguments set forth by Mr. Chastain's defense team and the government's responses in opposition. As of the date this article was written, the Court has not decided any of the motions.
Motion to Dismiss
On August 19, 2022, attorneys for Mr. Chastain filed a motion seeking an Order from the United States District Court, Southern District of New York, dismissing the indictment. In their papers, Mr. Chastain's defense team argues that the indictment must be dismissed as a matter of law for several reasons. First, they argue that insider trading wire fraud charges only apply to securities and commodities. Securities are, essentially, investments in a business, which often take the form of stocks and bonds. Commodities are investment goods sold freely to the public, such as agriculture, fuels and metals. Because NFTs are neither securities nor commodities, Mr. Chastain's team argues his purchases and sales of NFTs cannot be considered insider trading wire fraud. Moreover, his team argues that allowing the government to proceed with its wire fraud charges in this context essentially criminalizes a civil employment dispute, creating a slippery slope which would greatly expand the types of transactions that constitute wire fraud. Next, Chastain's team argues that the government's wire fraud claim cannot be sustained because the confidential information Mr. Chastain allegedly misappropriated (i.e. his personal thoughts about which NFTs to feature on the homepage) is not considered property belonging to OpenSea and, therefore, Mr. Chastain cannot have schemed to defraud OpenSea of any property.
Mr. Chastain's defense team also makes several arguments about why the money laundering charge should also be dismissed. One of their more interesting arguments is that, due to the public nature of the Ethereum blockchain, Mr. Chastain could not possibly have committed money laundering. That's because transactions underlying money laundering charges must have been designed to conceal the proceeds of the unlawful activity. Given the "open, visible, and public nature of the Ethereum blockchain," however, the defense team argues that Mr. Chastain's transactions (transferring cryptocurrency from one digital wallet to another on the blockchain where the NFTs at issue are stored) were inherently incapable of being concealed.
In response, the government argues that Mr. Chastain's motion to dismiss the indictment is not only procedurally improper, as the focus of a motion to dismiss is whether the charges are properly alleged, not whether they will ultimately be proven true, but also incorrectly applies the law to the facts at hand. While it does not dispute that NFTs are not traditional securities or commodities, the government argues that the misappropriation theory of wire fraud is not limited to cases involving those traditional types of assets and cites to several federal cases and language of the wire fraud statute in support of its position. The government also disputes that applying the misappropriation theory of wire fraud to transactions involving NFTs would open up a can of worms, broadly criminalizing civil employment disputes. With respect to its money laundering charges, the government argues in that, contrary to the defense team's position, Mr. Chastain's use of multiple new anonymous OpenSea accounts and Ethereum wallets to purchase, transfer and sell the NFTs at issue, rather than using his existing account and wallet, clearly shows that Mr. Chastain intended to conceal these NFT transactions. The procedural issues cited by the government in opposition to Mr. Chastain's motion are especially compelling.
Additional Motions for Miscellaneous Relief
On September 30, 2022, Mr. Chastain's defense team, while their motion to dismiss is still pending before the Court, filed three additional motions: a motion to strike what they claim is impermissible surplusage - that is, unnecessary or irrelevant language - from the indictment; a motion certain statements and other evidence; and a motion seeking an order directing OpenSea to respond to a subpoena issued by the defense team.
In the first of these three motions, the defense team asks the Court to strike the phrase "insider trading" from the indictment since, as they claim that that language is "inflammatory, unduly prejudicial and irrelevant" given that the government, in its opposition to the motion to dismiss discussed above, argued in part that, while appropriately used in the indictment to describe Mr. Chastain's actions, use of the phrase "insider trading" is mere nomenclature. In the second motion, Mr. Chastain's team argues that certain statements made by Mr. Chastain, including a statement revealing the passcode to his cell phone, and the contents of his phone which were subsequently obtained using that passcode were obtained in violation of his fifth amendment rights, because, the defense team argues, Mr. Chastain was effectively arrested and interrogated, but was not read his Miranda rights. Finally, in its third motion, the defense team contends that the government failed to request or provide copies of certain, highly relevant documents and information from Mr. Chastain's former employer, OpenSea, when discovery was exchanged in this case over the summer. Because these documents and information were not already requested or provided by the government, the defense team now asks the Court to issue a subpoena compelling OpenSea to release the documents to the defense team.
Because these three motions were filed just last week, the government has not formally responded to them yet.
Given the novelty of wire fraud and money laundering schemes involving NFTs and the slippery slopes Mr. Chastain's defense team raises alarm bells for in their motion to dismiss the indictment, it will be very interesting to see how the Court ultimately decides this motion and the case at large.
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