The wheels are in motion in the first NFT insider trading case | Ingram Yuzek Gainen Carroll & Bertolotti, LLP
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 claims is the first ever NFT-centric insider. trade arrangement. As explained in the unsealed indictment, part of Mr. Chastain’s duties as product manager at OpenSea, the largest online marketplace for NFTs, involved choosing which NFTs would be featured on the home page of OpenSea’s website. Usually, the price of an NFT increases significantly after it is featured on OpenSea’s website. Chastain is alleged to have “exploited his advanced knowledge of which NFTs would be featured on OpenSea’s website for his personal financial gain” by quietly purchasing dozens of soon-to-be-listed NFTs and selling them at a substantial profit after they were published on OpenSea’s website.
Over the past seven weeks, a series 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 main arguments put forward by Mr. Chastain’s defense team and the government’s response in opposition. As of the date this article was written, the court has not ruled on either petition.
Proposal for rejection
On August 19, 2022, lawyers for Mr. Chastain filed a motion for an order from the United States District Court, Southern District of New York, to dismiss the indictment. In their papers, 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 fraud charges only apply to securities and commodities. Securities are essentially investments in a business, which often take the form of shares and bonds. Commodities are investment goods that are freely sold to the public, such as agriculture, fuel and metals. Because NFTs are neither securities nor commodities, Mr. Chastain’s team argues that his buying and selling of NFTs cannot be considered insider trading fraud. Furthermore, 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 that will greatly expand the types of transactions that constitute wire fraud. Next, Chastain’s team argues that the government’s fraud claim cannot be sustained because the confidential information that Mr. Chastain allegedly misappropriated (ie, his personal thoughts about which NFTs to display on the website) is not considered property of OpenSea, and therefore has Mr. Chastain could not have planned to defraud OpenSea for any property.
Mr. Chastain’s defense team also makes several arguments as to 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 that form the basis of money laundering charges must have been designed to hide the proceeds of the illegal activity. However, given the “open, visible and public nature of the Ethereum blockchain,” the defense team argues that Mr. Chastain’s transactions (transferring cryptocurrency from one digital wallet to another on the blockchain where the NFTs in question are stored) were inherently incompetent. of being hidden.
In response, the government argues that 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 improperly applied. the law to the relevant facts. While not disputing that NFTs are not traditional securities or commodities, the government argues that the theory of wire fraud misappropriation is not limited to cases involving the traditional types of assets and cites to several federal cases and the language of wire- the fraud statutes in support. of his position. The government also disputes that applying the wire fraud misappropriation theory to transactions involving NFTs would open up a can of worms, grossly criminalizing civil employment disputes. With respect to the money laundering charges, the government argues that, contrary to the defense team’s position, Mr. Chastain’s use of several new anonymous OpenSea accounts and Ethereum wallets to buy, transfer and sell the NFTs in question, instead to use 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 proposal are particularly compelling.
Further proposals for various reliefs
On September 30, 2022, with their motion to dismiss still pending before the court, Chastain’s defense team filed three additional motions: a motion to strike what they claim is impermissible excess—that is, unnecessary or irrelevant language—from the indictment; a motion certain statements and other evidence; and a motion seeking an order requiring 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 term “insider trading” from the indictment, since they argue that the language is “inflammatory, unduly prejudicial and irrelevant” given that the government, in its opposition to the motion to dismiss discussed above, argued in part because even if it was used correctly in the indictment to describe Mr. Chastain’s actions, the use of the term “insider trading” is merely nomenclature. In the second motion, Mr. Chastain’s team argues that certain statements made by Mr. Chastain, including a statement revealing the password to his cell phone, and the contents of his phone subsequently obtained using that password were obtained in violation of his fifth. amendment rights, because, the defense team argues, Mr. Chastain was effectively arrested and questioned but was not read his Miranda rights. Finally, in their third motion, the defense team alleges that the government failed to request or obtain 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 is now asking the court to issue a subpoena compelling OpenSea to release the documents to the defense team.
Because these three proposals were submitted last week, the government has not yet formally responded to them.
Given the novelty of wire fraud and money laundering schemes involving NFTs and the slippery slopes. Mr. Chastain’s defense team is ringing alarm bells because in its motion to dismiss the indictment, it will be very interesting to see how the court ultimately rules on this motion and the case. by the way.
