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 Justice Department press release called this enforcement an indictment of “the first ever digital asset insider trading scheme,” Chastain’s indictment was not actually based on typical insider trading laws that involve violations. securities laws, but 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 count of wire fraud was insufficiently substantiated because the “insider trading” wire fraud charge requires trading in securities or commodities.
The court refused 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: “Any person who has devised or intends to devise any scheme or ruse for the purpose of defrauding or obtaining money or property by means of false or fraudulent excuses, representations or promises…”. [emphasis added]).
- Similarly, regarding the money laundering allegation, the court noted that “Given that the Ethereum blockchain is public, the government may have trouble proving beyond a reasonable doubt that the transactions in question were “planned in whole or in part.” . . to conceal or disguise the nature, location, source, ownership, or control of proceeds.”
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, while the government’s statements of indictment referred to “insider trading”, the court clarified that Chastain “has not been 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 a conviction of this type required trading in securities or commodities. The court suggested that the label “insider trading” might be “misleading”, but such an issue could be resolved separately by striking it out of the pleadings or expelling 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.