May 25, 2023

Guilty! Criminal Convictions In The First Ever NFT And Cryptocurrency Insider Trading Cases

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Last year, we discussed the NFT-related criminal charges filed against Nathaniel Chastain, OpenSea's former product manager. For those who are not familiar with his case, in late May 2022, the United States Department of Justice indicted and arrested Mr. Chastain, charging him with wire fraud and money laundering in connection with what the government alleged to be the first ever NFT-centered insider trading scheme. As the Department of Justice explained in its indictment, part of Mr. Chastain's duties as a product manager at OpenSea included choosing which NFTs to highlight on the homepage of OpenSea's website. Typically, the price of an NFT significantly increases after being featured on OpenSea's homepage, which should come as no surprise given that featuring an NFT on OpenSea's homepage effectively amounts to an endorsement of that NFT by the largest online marketplace for NFTs. The government accused Mr. Chastain of "exploit[ing] 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.

Now, the government has come out on top in this case. On May 3, 2023, after a week-long trial in the Southern District of New York and two days of deliberations, the federal jury found Mr. Chastain guilty of wire fraud and money laundering. Mr. Chastain faces up to 20 years in prison at his sentencing schedule for August 22nd. Despite the flurry of pre-trial motions filed by Mr. Chastain's defense team, prosecutors prevailed. Mr. Chastain's defense team had argued that the charges must be dropped because insider trading charges only apply to securities and commodities and NFTs are neither securities nor commodities. However, by charging Mr. Chastain with wire fraud, rather than alleging securities fraud charges which are central to most traditional insider trading cases, prosecutors were able to "skirt the issue of whether non-fungible tokens are legally classified as a security, a hotly debated topic in the world of digital assets." The door is now wide open on the heels of this successful verdict for the government to bring charges against other allegedly duplicitous NFT players in an attempt to weed out fraud in the industry.

In fact, the government has already successfully used a similar argument in what was dubbed the first ever cryptocurrency insider trading case. Just last week, Ishan Wahi, a former Coinbase Global Inc. product manager, was sentenced to two years in prison after pleading guilty to two counts of conspiracy to commit wire fraud. Mr. Wahi was one of three people charged with wire fraud and wire fraud conspiracy after Mr. Wahi allegedly tipped off his brother and friend that certain crypto assets and tokens were about to be listed on Coinbase's exchanges. Just like with Mr. Chastain's case, the fact that the assets at issue are fairly novel digital assets - for Mr. Wahi, cryptocurrency; in Mr. Chastain's case, NFTs - did not matter because the charges were framed wire fraud, not securities fraud. As FBI Assistant Director Michael J. Driscoll commented on Mr. Wahi's indictment, "Although the allegations. . . relate to transactions made in a crypto exchange - rather than a more traditional financial market - they still constitute insider trading." Mr. Wahi's brother, Nikhil Wahi, also plead guilty, admitting to making trades based on the confidential information his brother provided to him. He was sentenced to ten months in prison earlier this year. Their friend, Sameer Ramani, who is also alleged to have made trades using the same insider information is still at large.

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