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In late October, the New York District Court refused to dismiss a Department of Justice (DOJ) indictment against defendant Nathaniel Chastain, who was charged with wire fraud and money laundering related to his use of insider information to purchase non-fungible tokens (NFTs) earlier. . to be featured on OpenSea, an online NFT marketplace, and then sold at a profit. (USA vs. Chastain, No. 22-kr-305 (SDNY dated October 21, 2022)). Despite the headlines and the fact that a DOJ press release described the enforcement as charges in connection with “the first-ever digital asset insider trading scheme”, Chastain’s indictment was not actually based on typical insider trading laws. related to violations of securities laws, and the Federal Electronic Fraud Act. Indeed, despite the flavor of insider trading, the word “security” does not appear in the indictment, and the court, in refusing to dismiss the DOJ’s wire fraud claim, held that the government’s wire fraud claim did not require a “valuable paper.” .”
As we reported in a previous post about the case, Chastain, a former product manager for OpenSea, was indicted in New York in June 2022 for his NFT profit scheme. As part of his role, Chastain was responsible for selecting NFTs to list on the OpenSea homepage; OpenSea kept these special NFT choices confidential until they were made public, as the homepage listing often resulted in price spikes for recommended NFTs and others created by the same creator. Between June 2021 and September 2021, Chastain pre-purchased these NFTs (or others created by the same creator) and then sold them for a significant profit. To cover up the alleged scam, the Justice Department said Chastain conducted these transactions using anonymous digital cryptocurrency wallets and OpenSea accounts. The Department of Justice brought one count of wire fraud (18 USC § 1343) and one count of money laundering (18 USC § 1956(a)(1)(B)(i)) against Chastain.
Chastain subsequently offered to dismiss the indictment, arguing, among other things, that: (1) the wire fraud count should be dismissed because the information he allegedly misappropriated is not “property” within the meaning of the law (a position supported by one memo amicus filed in the case); (2) the money laundering count was insufficient because the Government did not sufficiently identify two elements of the offense (namely, the elements of concealment and financial transaction) and sought to criminalize the mere movement of money; and (3) the wire fraud count was not sufficiently substantiated because the wire fraud charge of “insider trading” requires trading in securities or commodities.
The court declined to dismiss the indictment (citing the high standard of rejection at the Rule 12(b) stage) and characterized Chastain’s arguments as “about the sufficiency of the evidence, not the adequacy of the indictment”, which would be better left to consideration. jury. However, the court noted that “Chastain’s first two arguments have some force” depending on what the evidence in the case ultimately demonstrates:
- The court found the indictment sufficient at the time, but stated that it may not be possible for the government to prove beyond reasonable doubt that the information in question regarding wire fraud (i.e. which NFTs would be presented on the OpenSea website as well) constitutes “confidential commercial information” and thus “property” within the meaning of the law. (18 USC § 1343: “A person who has devised or intends to devise any scheme or subterfuge for the purpose of defrauding or obtaining money or property by means of false or fraudulent excuses, statements or promises…” [emphasis added]).
- Similarly, with regard to the money laundering allegation, the court noted that “given that the Ethereum blockchain is public, the government may have problems proving that the transactions in question were “in whole or in part… or obscure the nature, location, source, right ownership or control of income.”
The Court was more forceful on Chastain’s last point, finding no merit in his argument that the government’s “misappropriation theory” of electronic fraud requires trading in securities or commodities. As discussed earlier, although the government’s statements of indictment referred to “insider trading”, the court clarified that Chastain “was not charged with insider trading, at least in the classic sense of the term, which is a means of engaging in securities fraud. in violation of Section 10(b) of the Securities Exchange Act of 1934 and [SEC Rule 10b-5]The Court added that, unlike an insider trading action under Section 10(b), which is limited to fraud “in connection with the purchase or sale of any security”, Section 1343 does not refer to securities or commodities, and no court has ever ruled that this type of conviction required trading in securities or commodities. The court suggested that perhaps the label “insider trading” was “misleading”, but such an issue could be resolved separately by excluding it from the pleadings or excluding it in court .
The ruling concludes by highlighting how federal prosecutors can broadly apply wire fraud (and related mail fraud) laws to a range of activities, including more modern activities in and beyond the digital asset space, without the need to set out or describe how the property or asset in question is a “security”. The use of this statute arguably gives the Department of Justice more flexibility than the SEC, which is responsible for enforcing potential violations of federal securities laws and regulations.
District Court refuses to dismiss NFT ‘insider trading’ charge against former OpenSea employee
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