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 headlines and a DOJ press release labeling this enforcement as a prosecution 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. Indeed, despite the insider trading ambiance, the word “security” did not appear in the indictment, and the court refused to dismiss DOJ’s wire fraud allegations in favor of the government’s wire fraud claims. We have determined that the allegation 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 suspected fraud, DOJ claimed 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 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 charges was understated 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) stage), citing Chastain’s arguments as “about the sufficiency of the evidence, not the adequacy of the indictment.” characterized. jury. Still, the court says, “Chastain’s first two arguments are somewhat persuasive,” 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 constitutes “property” in the legal sense. (18 USC § 1343: “Anyone who devises or intends to devise a scheme or scheme to commit fraud or to obtain money or money 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 has determined that the transaction at issue was ‘engineered in whole or in part.’ We may have trouble proving it beyond a reasonable doubt.” . conceal or disguise the nature, location, origin, ownership or control of any earnings; ”
The court made more emphasis on Chastain’s final allegations and found that Chastain’s allegations that the government’s “embezzlement theory” of wire fraud required the trading of securities or commodities were unfounded. As noted above, the government’s statement on the indictment referred to “insider trading,” but the court ruled that Mr. Chastain was “indicted for insider trading in the classical sense, at least in the sense that it is a means of engaging in securities fraud.” I have not.” Section 10(b) of the Securities Exchange Act of 1934 and [SEC Rule 10b-5]The court held that, unlike section 10(b)’s insider trading claims, which are limited to fraud “related to the purchase or sale of securities,” section 1343 does not refer to securities or commodities, and no court has Even so far, convictions of this kind require trading in securities or commodities. The court suggested that perhaps the label “insider trading” was “misleading,” but such issues could be addressed on a case-by-case basis by either excluding it from the petition or excluding it at trial. can be processed.
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 will arguably give her DOJ more flexibility than the SEC, which is responsible for cracking down on potential violations of federal securities laws and regulations.