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In late October, the New York District Court ruled against defendant Nathaniel Chastain, who was charged with wire fraud and money laundering in connection with his use of insider knowledge to purchase non-fungible tokens (NFTs). ) refused to dismiss the indictment. They were featured on OpenSea, an online NFT marketplace, and later sold at a profit. (USA vs. Chastain, No. 22-cr-305 (SDNY 21 October 2022)). Despite the headlines and the fact that DOJ press releases label the execution as an indictment brought,”First-ever Digital Asset Insider Trading Scheme,” Chastain prosecution In fact, it wasn’t based on typical insider trading laws, including securities law violations, but on federal wire fraud laws. In fact, despite the insider trading ambiance, the word “security” did not appear in the indictment, and the court refused to dismiss his DOJ wire fraud allegations, claiming government wire fraud. ‘s claim does not require the presence of “security.” .”
as previously related previous post about casesFormer OpenSea product manager Chastain was indicted in June 2022 in New York for NFT profit schemes. As part of that role, Chastain was responsible for selecting his NFTs for inclusion on OpenSea’s home page. OpenSea kept these special his NFT selections secret until they went live. This is because the listings on the main page were often transformed into notable his NFTs and other price spikes by the same creator. In the period from June 2021 to September 2021, Chastain will pre-purchase these remarkable NFTs of his (or others by the same creator) and sell them at a sizable profit. did. To cover up suspicion of fraud, DOJ claimed that his Chastain used an anonymous digital cryptocurrency wallet and his OpenSea account to make these transactions. DOJ alleges against Chastain that he has one count of wire fraud (18 USC§1343) and that he has one count of money laundering (18 USC§1956(a)(1)(B)(i)). did.
Chastain then sought the dismissal of the indictment, arguing, among other things, that: (1 amicus brief filed in the lawsuit); (2) because the government failed to adequately assert his two elements of the crime (i.e., the concealment and financial transaction elements) and attempted to criminalize the mere transfer of money; , was undercounted for money laundering. (3) The number of wire fraud cases is underasserted because the existence of trading in securities or commodities is required for accusations of “insider trading” wire fraud.
The court refused to dismiss the indictment (because of its high bar for dismissal at the Rule 12(b) level), characterizing Chastain’s argument as “about the sufficiency of the evidence, not the adequacy of the indictment.” added. jury. Still, the court said, “Chastain’s first two claims have some strength,” depending on what the evidence in the case ultimately proves.
- The court ruled that the indictment was sufficient for the time being, but said the government would probably not be able to prove beyond reasonable doubt that the information in question was related to wire fraud. (i.e. which NFTs are featured and, for the OpenSea website), constitutes “confidential business information” and therefore “property” in the legal sense. (18 USC § 1343: “Whoever commits fraud, or property By false or fraudulent pretensions, representations or promises….” [emphasis added]).
- Similarly, on money laundering charges, the court ruled that “given that the Ethereum blockchain is public, the government believes that the transaction in question was ‘designed to hide in whole or in part.’ We may have a hard time proving it beyond a reasonable doubt.” or misrepresent the nature, location, origin, ownership or control of any proceeds. ”
The court made more emphasis on Chastain’s final allegations, finding no basis for Chastain’s allegations that the government’s “embezzlement theory” of wire fraud required the trading of securities or commodities. As noted above, the government’s statement on the indictment referred to “insider trading,” but the court found that Chastain “was charged with insider trading in the classical sense, at least by way of engaging in securities fraud.” No,” he said. Section 10(b) of the Securities Exchange Act of 1934 and [SEC Rule 10b-5]The court found that unlike Section 10(b)’s insider trading allegations, which are limited to fraud “related to the purchase or sale of securities,” Section 1343 does not refer to securities or commodities. , adding that the court has never ruled. This type of conviction requires trading in securities or commodities. The court suggested that perhaps the label “insider trading” was “misleading.”
The final part of the ruling highlights how federal prosecutors can apply wire fraud (and companion mail fraud) laws broadly. The property or asset in question is a “securities”. Using this law, the DOJ will arguably have more flexibility than the SEC, which is responsible for cracking down on potential violations of federal securities laws and regulations.
District Court Rejects NFT’s ‘Insider Trading’ Charges Against Former OpenSea Employee
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