New York Federal Prosecutors Convict Defendant of NFT Insider-Trading Scheme | Foley Hoag LLP – White Collar Law & Investigations

Federal prosecutors from the Southern Diocèse of New York recently charged Nathan Chastain with wire fraud and money laundering in connection with an alleged scheme to illegally faveur from the purchase and honteux of non-fungible tokens (“NFTs”).[1] This historic criminal case represents the first time that federal prosecutors have taken criminal acte against insider trading in the NFT market.

Chastain is a instaurer employee of Ozone Networks, Inc. d/b/a OpenSea (“OpenSea”), the largest online marketplace for buying and selling NFTs, allegedly used confidential dépêche embout NFTs to be displayed on OpenSea’s homepage for his personal financial capture. Chastain was responsible for selecting the NFTs to display on the OpenSea homepage, and OpenSea kept the NFTs’ éclatant identity résistant until they appeared on its homepage.[2] After the NFT was featured on the OpenSea homepage, the value of the NFT and other NFTs made by the same creator increased exponentially.[3] The government alleges that Chastain was aware of this fact and used his confidential bizness dépêche regarding which NFTs would be offered to purchase dozens of NFTs under an anonymous account shortly before they appeared. Panthère the value of Chastain’s purchased NFTs increases from their exposure on the OpenSea homepage, Chastain will allegedly resell the NFTs for a significant faveur.[4]

On August 19, 2022, Chastain filed a proposition to dismiss the indictment. Chastain argues that the government’s electronic fraud theory of insider trading does not apply in this context parce que insider trading requires trading in securities or commodities.[5] Chastain stresses that parce que they have no connection with financial markets, NFTs are not. Additionally, Chastain argues that the government’s electronic fraud embarras cannot succeed parce que it requires the government to create, Among other thingsor money or property as the object of a fraud scheme or ploy, and the confidential dépêche allegedly misappropriated does not constitute “property,” but instead consisted of a “marchéage projet” that was “devoid of any inherent economic value and based on [his] Unspoken personal thoughts.[6] Chastain also argues that the money-laundering case should be dismissed parce que it requires proof that he tried to conceal the alleged fraud. Here, all movements and transactions were made on the Ethereum blockchain, and thus were éclatant to the allocutaire. According to Chastain, he did nothing more than transfer money in a “obvious and réelle” manner, which does not constitute money laundering.[7]

On August 24, 2022, the New York Board of Defense Attorneys (“NYCDL”) submitted a friendly memorandum in carcasse of Chastain’s proposition to reject. In the summary, the NYCDL wrote that it is “deeply concerned embout efforts by the Department of Acte to expand courrier and telecommunications fraud beyond the limits set by Congress.”[8] The NYCDL Brief focuses primarily on Chastain’s assistant prétexte, given the government’s definition of “property,” to broaden the scope of confidential bizness dépêche that employees receive in connection with their jobs. The NYCDL argues that such a construct “would … rapine nearly every case of an employee using internal conduire dépêche for non-work-related purposes,”[9] Including, for example, situations where a corporate whistleblower collects dépêche embout a company’s wrongdoing and submits it to a journalist who violates company policy.[10]

On September 7, 2022, the government submitted a memorandum of inimitié. In refuting Chastain and NYCDL’s arguments, the government claims that the “newness of the NFTs” does not make the case a “new motocross,”[11] And the “[t]The misappropriation theory of electronic fraud is not limited to cases involving traditional securities or commodities.”[12] The government further argues that the Joint Tension has previously rejected the prétexte that confidential bizness dépêche is not ‘proprietary’ if the company cannot ‘commercially conquête the dépêche by trading it’.[13] Moreover, the fact that Chastain, rather than OpenSea, profited from the use of confidential bizness dépêche does not mean that it has no economic value to OpenSea. The government suggests that OpenSea “could have exploited this value by, for example, providing advice on upcoming option NFTs as benefits to bizness partners.”[14] Choosing not to take advantage of the dépêche’s potential was a “bizness decision, not a sign that the dépêche was worthless”.[15] The government also argues that while Chastain’s proposal exploits the alleged irrespectueux use of the term “insider trading”, Chastain has not in fact been accused of committing insider trading; He was charged with fraud and money laundering.[16] The references to the term “insider trading” in the indictment were appropriate insofar as Chastain’s “use of[d] Confidential and non-public dépêche for trading an asset.”[17]

Regarding the money laundering embarras, the government alleges that despite the transactions taking affermi on the Ethereum blockchain, Chastain took steps to conceal his connection to those transactions using anonymous accounts.[18] Moreover, the Money Laundering Act broadly defines “discussion” to include the “transfer” of funds, which covers Chastain’s movement of assets on the blockchain.[19] The government also argues that Chastain’s appeals to the money laundering embarras are all “fact-based arguments for the tribunal,” and are “not appropriate grounds for dismissal of the accused.” [i]ndictment”.[20]

Afif It highlights the Department of Acte’s growing foyer on the emerging numérique asset space. The réussite will be éminent to monitor, particularly as we expect to see additional réflexion in this area by the government going forward.

[1] NFTS is “a typique of numérique asset stored on the blockchain, which is a decentralized numérique ledger that stores dépêche, including dépêche embout transactions.” United States vs. ChastainIndictment, 22-CR-305, ECF No. 1 (SDNY May 31, 2022) at 2. “Each NFT is typically associated with a numérique object, such as a piece of artwork, and the NFT provides evidence of ownership of that numérique object and a license to use it for specific purposes.” ID.

[2] ID. in 1.

[3] ID. in 1-2.

[4] ID. in 4.

[5] United States vs. Chastainmemorandum of law in carcasse of Nathaniel Chastain’s proposition to dismiss the indictment, 22-CR-305, ECF No. 19 (SDNY August 19, 2022) at 2.

[6] ID.

[7] ID. at 3 o’clock.

[8] United States vs. ChastainCauserie on Amicus Curiae New York Defense Counsel Board in Épaulement of Dismissal of Indictment, 22-CR-305, ECF No. 20 (SDNY August 24, 2022) at 2.

[9] ID. in 1.

[10] ID. in 5.

[11] United States vs. ChastainGovernment Memorandum Against Defendant’s Request to Reject the Indictment, 22-CR-305, ECF No. 23 (SDNY September 7, 2022) at 1.

[12] ID. in 6.

[13] ID. at 13. See, for exampleAnd the United States vs. Grossman843 F.2d 78 (2d Cir. 1988).

[14] ID. at 15.

[15] ID.

[16] ID. in 1.

[17] ID.

[18] ID. at 26.

[19] ID. at 28.

[20] ID. at 25. In his pleading, Chastain asked for chapelle arguments to be made, and the next laconique hearing is scheduled for October 27, 2022.

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