Guilty! Criminal convictions in the first ever NFT and cryptocurrency insider trading cases | Ingram Yuzek Gainen Carroll & Bertolotti, LLP
Last year we discussed NFT-related criminal charges against Nathaniel Chastain, OpenSea’s former chief product officer. For those unfamiliar 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 claimed was the first ever NFT. centralized insider trading scheme. As the Justice Department explained in its indictment, part of Mr. Chastain’s duties as product manager at OpenSea included choosing which NFTs to highlight on the home page of OpenSea’s website. Typically, the price of an NFT increases significantly after being featured on OpenSea’s website, which should come as no surprise given that having an NFT on OpenSea’s website actually constitutes an endorsement of that NFT by the largest online marketplace for NFTs. The government accused Chastain of “exploitation[ing] his advanced knowledge of which NFTs will be featured on OpenSea’s website for his personal financial gain” by setting up to buy dozens of soon-to-be-featured NFTs and sell them at a substantial profit after they were published on OpenSeas website.
Now the government has come out on top in this matter. 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 the Aug. 22 sentencing hearing. Despite the flurry of pretrial motions filed by 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. But by charging Mr. Chastain with wire fraud, rather than alleging the securities fraud that is central to most traditional insider trading cases, prosecutors were able to “sidestep the question of whether non-fungible tokens are legally classified as a security, a hotly contested 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 duplicative NFT players in an effort to weed out fraud in the industry.
In fact, the government has already successfully used a similar argument in what was called 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 cryptoassets and tokens were about to be listed on Coinbase’s exchanges. Just as with Mr. Chastain’s case, the fact that the assets involved are fairly new digital assets—for Mr. Wahi, cryptocurrency; in Mr. Chastain’s case, the NFTs—didn’t matter because the charges involved 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 pleaded guilty, admitting to making trades based on the confidential information his brother gave him. He was sentenced to ten months in prison earlier this year. Their friend, Sameer Ramani, who also allegedly made trades at using the same inside information, is still at large.
