Turning On… Crypto Insider Trading Is Targeted – Finally! Part 2 – Cointelegraph Magazine

This is the second part of my column on the crackdown on insider trading involving crypto. In the first part, I discussed the criminal charges against Nathaniel Chastain, a former product manager at the OpenSea NFT marketplace. I also discussed the SEC’s allegations against former Coinbase employee Ishan Wahi, his brother and his friend based on the “abuse” theory of insider trading.

Turn on… is a monthly opinion column from Marc Powers, who spent much of his 40-year legal career working on complex securities-related cases in the United States after a stint at the SEC. He is now an adjunct professor at Florida International University College of Law, where he teaches “Blockchain & the Law.”

Since United States v. O’Hagan Supreme Court case in 1997, the notification theory of insider trading liability has been explicitly recognized. Both before and after that date, “misappropriation” of trade secrets or confidential information used in connection with stock trading has been an active area of ​​Securities and Exchange Commission enforcement and prosecution.

Examples include a former writer for The Wall Street Journal i United States v. Winans; employees at the magazine stand Hudson News i Securities Exchange Commission v. Smath; a printer at a company that printed tender documents Chiarella v. United States; and more recently, financial analysts i United States v. Newman and Salman v US. On the same date as the SEC indictment against Ishan Wahi and his two associates, the US Attorney for the Southern District of New York dismissed a parallel criminal indictment charging the same three defendants with wire fraud and wire fraud conspiracy.

Tipsters who receive material, nonpublic or confidential information from a tipper are in violation of insider trading rules if they know that the tipper breached a duty owed to another and received some kind of personal benefit from the tip. The Supreme Court said so in 2016 Salman case that the personal benefit need not be monetary or financial. The performance requirement is satisfied by giving a gift of this information to a trading relative or a close friend.

Frankly, it is time for the SEC and US Attorneys offices to focus on real crimes and fraud. This is exactly what insider trading is: fraud. It is an unfair trading advantage by someone who learns confidential information and acts on it for financial gain and profit. But this Wow the case raises the question of what insider trading is. As I said earlier, insider trading involves trading in “securities”. Accordingly, in bringing its case, the SEC contends that at least nine of the tokens listed on Coinbase and pre-traded by the defendants fit the “investment contract” analysis of the Howey test. But do they actually do it?

The SEC says some of the tokens are “purported” to be governance tokens but are “securities”. So it’s worth noting this warning shot. For those token issuers taking comfort from lawyers who have decreed that their tokens are not securities because they are governance tokens, beware — and perhaps get a second opinion from a qualified securities attorney.

Aside from the interesting aspects of this particular case, what does it mean for others, such as Coinbase itself? Well, the SEC claims that certain tokens on their exchange are “securities”. If so, Coinbase should be registered as a “securities exchange” under the Securities Exchange Act of 1934. Not surprisingly, a few days after the SEC filing, it was reported that Coinbase was under SEC investigation.

My view is that SEC Chairman Gary Gensler is using this case as a further “land grab” to take jurisdiction over digital assets – and crypto specifically – away from the Commodity Futures Trading Commission. I’ve said this before. Indeed, CFTC Commissioner Caroline D. Pham is also reviewing the SEC’s efforts.

On the day of complaint filing, she issued a public statement that said: “The SEC’s allegations could have broad implications beyond this single case, and underscore how critical and urgent it is for regulators to work together. Big issues are best resolved through a transparent process that engages the public in developing appropriate policy. […] Regulatory clarity comes from being out in the open, not in the dark.”

Pham also said, “SEC v. Wahi is a striking example of “regulation by enforcement.” Four days later, on July 25, CFTC Chairman Rostin Behnam spoke at the Brookings Institute and reiterated the view that the CFTC would be the natural and best regulator to oversee crypto.

What about the nine “issuers” of the nine tokens the SEC claims are securities? Well, they can also expect to be subject to independent investigations by SEC staff looking into registration violations. Each of their ICOs or offerings is within the five-year statute of limitations for the SEC to bring enforcement actions against them. Watch.

The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph or Florida International University College of Law or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.