The first ever NFT insider trading case is to be tried
The first-ever trial involving alleged insider trading in digital tokens begins in a New York federal court on Monday, a test of how the Justice Department applies ancient laws to a new and lightly regulated industry.
The first-ever trial involving alleged insider trading in digital tokens begins in a New York federal court on Monday, a test of how the Justice Department applies ancient laws to a new and lightly regulated industry.
The defendant, Nathaniel Chastain, is a former employee of OpenSea, the largest online marketplace for non-fungible tokens, and his case centers on whether he used confidential information to buy NFTs ahead of the company listing them on its website.
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The defendant, Nathaniel Chastain, is a former employee of OpenSea, the largest online marketplace for non-fungible tokens, and his case centers on whether he used confidential information to buy NFTs ahead of the company listing them on its website.
The US attorney’s office in Manhattan charged Mr. Chastain in 2022 with wire fraud and money laundering, alleging that in 2021 he used non-public OpenSea information to buy NFTs and later sell them at a profit, knowing that prices theirs would increase after being featured. While federal prosecutors described Mr. Chastain’s alleged crimes as an insider trading scheme, they did not bring traditional insider trading charges, which involve securities or commodities violations.
Mr. Chastain has pleaded not guilty to the charges. His trial is expected to last one to two weeks.
The case comes as Damian Williams, the U.S. attorney for the Southern District of New York, and other prosecutors have stepped up their investigation into the crypto industry, which at times operates in gray areas of the law. Prosecutors have sought to target alleged conduct that would raise legal concerns if committed in connection with traditional financial products.
Manhattan federal prosecutors obtained guilty pleas from two brothers charged last year in the first-ever insider trading scheme involving cryptocurrency. One of the siblings, a former Coinbase Global Inc. employee, admitted to tipping off his brother and a friend to confidential information from work about upcoming digital currencies the exchange planned to list. Prosecutors said the recipients used the information to trade the currencies before they went public. The case left unresolved important legal questions about whether some crypto assets can be considered unregistered securities.
Other high-profile cases have been more straightforward. In December, Mr. Williams’ office charged FTX founder Sam Bankman-Fried with criminal wrongdoing related to the collapse of his crypto exchange. The indictment included sweeping allegations of a global fraud scheme, but at the root of the case, Manhattan federal prosecutors accused Mr. Bankman-Fried of stealing billions of dollars from FTX customers. He has pleaded not guilty and will go to trial in October.
In the NFT case, lawyers for Mr. Chastain have said that OpenSea, the alleged victim, suffered no harm because it received commissions on all the transactions mentioned in the indictment. They have also accused prosecutors of mischaracterizing Mr. Chastain’s alleged crime as insider trading to grab headlines. Federal regulators have not formally identified NFTs as either a security or a commodity, a necessary prerequisite to bringing formal insider trading charges, they say.
The argument did not persuade U.S. District Judge Jesse Furman, who is presiding over the case. He shot down Mr. Chastain’s request to prevent prosecutors from describing the alleged scheme as insider trading to jurors, saying in a ruling last week that the term was not an inappropriate description of the allegations.
Judge Furman also agreed with prosecutors that confidential information can be considered property, a key element of the Justice Department’s fraud case, citing a 1987 Supreme Court decision in Carpenter v. United States, a fraud case involving a former Wall Street Journal columnist convicted of sharing non-public information about his column before publication. Mr. Chastain’s lawyers argued unsuccessfully that confidential information was not property because it had no inherent economic value.
A lawyer for Mr. Chastain and a spokesman for the U.S. attorney’s office in Manhattan both declined to comment for this article.
Brian Jacobs, a former federal prosecutor, said the charges have drawn attention because crypto has been largely unregulated and prosecutions that test the limits of the Carpenter decision don’t happen very often. There is also a question of whether the government is criminalizing behavior that should be treated as a workplace dispute, he said.
“It remains to be seen how the government will be able to explain why it is involved in protecting a market it has not been involved in protecting before,” said Mr. Jacobs, a partner at Morvillo Abramowitz Grand Iason & Anello PC.
Eugene Ingoglia, a former federal prosecutor who is now a partner at Allen & Overy LLP, said the trial is likely to focus on whether the information Mr. Chastain used was actually confidential and restricted under company policy.
“If it is not clear that the information was to be kept confidential or treated in a certain way, then he cannot be convicted of knowingly committing a fraud,” Ingoglia said.
Prosecutors have said that OpenSea, which was founded in 2017, treated the information as confidential and that Chastain signed a confidentiality agreement when he started working for the company, which included a “protection of information” provision.
Lawyers for Mr. Chastain have argued that the information was not confidential and that relevant company rules were not clear.
“Not only were there no OpenSea policies, training or compliance programs to inform employees of any restrictions on trading NFTs, the government would have the jury believe that a generic confidentiality agreement, signed by newly hired employees, covered the conduct,” lawyers said in a filing.
