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Crypto Firms Announce New Initiatives; IOSCO, FSB, BIS Publish Digital Asset Reports; OFAC, SEC, DOJ Bring Crypto Actions; Hackers Steal $97M and $50M, *Client Alert*

<h5>Takeaways</h5>  <ul> 	<li>On May 3, 2023, a jury found a former NFT marketplace manager guilty of wire fraud and money laundering for his misuse of “confidential business information” with the intent to profit off the sales of certain NFTs and for his efforts to conceal his unlawful actions.</li> 	<li>While initially termed a “digital asset insider trading” case by prosecutors, the case was not brought under the securities fraud statute; prosecutors relied on a misappropriation theory of wire fraud to allege that the marketplace manager’s misappropriation of nonpublic information constituted fraudulent use of company property.</li> 	<li>The case shows the government’s ability to hold accountable those who engage in “insider trading” type activities without having to allege the underlying assets qualify as securities.</li> 	<li>In light of the case’s outcome, digital asset businesses should strongly consider reviewing and/or redrafting comprehensive insider trading policies, confidentiality agreements, and other policies to prevent fraud, even if the assets at issue are not alleged to be financial instruments subject to insider trading laws, such as those promulgated under U.S. securities laws.</li> </ul>  <h5>Overview</h5>  <p>On May 3, 2023, a jury found Nathaniel Chastain, a former manager of OpenSea (a major NFT marketplace), guilty of wire fraud and money laundering in connection with his attempts to conceal his use of confidential business information for his own personal gain.<a href="#_ftn1" name="_ftnref1" title="">[1]</a></p>  <p>The verdict stems from an indictment brought last year by the U.S. Attorney’s Office for the Southern District of New York (USAO), which accused Chastain of engaging in (1) wire fraud based on an insider trading scheme involving misappropriated confidential information and (2) money laundering.<a href="#_ftn2" name="_ftnref2" title="">[2]</a> Specifically, the USAO charged Chastain with using information about which NFTs would be displayed on the OpenSea homepage, purchasing certain NFTs before they were featured on OpenSea, and then selling them once their value spiked. He then allegedly tried to hide his conduct by using anonymous Ethereum addresses and OpenSea accounts. In whole, he received more than $50,000 in profits through the scheme. By not asserting an “insider trading” cause of action under the criminal securities fraud statute, the USAO avoided the significant burden of proving beyond a reasonable doubt that the subject NFT transactions qualified as offers or sales of securities.</p>  <h5>Pretrial Issues Crystallized for Trial</h5>  <p>In the proceedings’ initial stages, Chastain filed a motion to dismiss the indictment and challenged the validity of both charges.<a href="#_ftn3" name="_ftnref3" title="">[3]</a> The Court agreed that Chastain’s legal arguments had “some force,” but denied his motion to dismiss on the basis that it was premature and the government had not yet made “a full proffer of the evidence it intend[ed] to present at trial.” <a href="#_ftn4" name="_ftnref4" title="">[4]</a> </p>  <p><em>Wire Fraud Charge</em></p>  <p>The government’s wire fraud charge against Chastain was based on allegations that he knowingly, with an intend to defraud, misappropriated “property” in the form of “confidential business information” (nonpublic information about which NFTs would be featured on the marketplace and when) for his own personal gain.<a href="#_ftn5" name="_ftnref5" title="">[5]</a> The parties argued two key issues with respect to this charge: (i) whether the government’s reliance on a misappropriation theory of wire fraud was permissible given that a cause of action with respect to insider trading activities would otherwise require the underlying assets be deemed securities or commodities and (ii) whether the information at issue qualified as property under the federal wire fraud statute, which prohibits “using interstate wires as part of ‘any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.’”<a href="#_ftn6" name="_ftnref6" title="">[6]</a></p>  <p>With respect to the first issue, the Court firmly held that Chastain’s assertion that the “misappropriation theory” of wire fraud requires trading in securities or commodities transactions was “wholly without merit” since the statute “makes no reference to securities or commodities.”<a href="#_ftn7" name="_ftnref7" title="">[7]</a> However, the Court agreed that Chastain’s argument – whether “the mere selection of an item for prominent display” was covered property under the wire fraud statute – had merit and was a dispute of fact to be determined at trial.<a href="#_ftn8" name="_ftnref8" title="">[8]</a>   </p>  <p><em>Money Laundering Charge</em></p>  <p>The government’s money laundering charge was based on its allegation that Chastain misappropriated confidential business information “knowing that the property involved . . . represented the proceeds of some form of unlawful activity” and attempted to “conceal and disguise the nature, the location, the source, the ownership, and the control of the proceeds of specified unlawful activity.”<a href="#_ftn9" name="_ftnref9" title="">[9]</a> Chastain moved for dismissal of this charge on the basis that it is impossible to attempt to conceal transactions conducted over permissionless blockchains because they are “completely visible to the public.”<a href="#_ftn10" name="_ftnref10" title="">[10]</a> Conversely, the government argued that public access to blockchain data is immaterial when a defendant engages in a course of action designed to conceal unlawful transactions through “anonymous” accounts.<a href="#_ftn11" name="_ftnref11" title="">[11]</a> The Court deemed this a factual issue to be decided at trial.</p>  <h5>The Jury’s Deliberation</h5>  <p>The question of whether the information at issue qualified as “confidential business information” appeared to be given great weight by the jury.<a href="#_ftn12" name="_ftnref12" title="">[12]</a> For example, during its deliberations, the jury requested a copy of the transcript of Devin Finzer, co-founder and CEO of OpenSea, who stated during trial that he “hadn’t thought closely about whether what NFTs would be featured and when was confidential information.”<a href="#_ftn13" name="_ftnref13" title="">[13]</a> Several hours later, the jury provided notice to the Court that it was unable to reach a unanimous verdict before asking the Court for clarity on how it should analyze the information alleged as confidential.</p>  <p>Other facts the jury may have considered included Chastain’s assertion that his actions were conducted without criminal intent and that his employer failed to provide “specific guidance prohibiting the conduct.”<a href="#_ftn14" name="_ftnref14" title="">[14]</a> For example, Chastain argued during trial that after he left OpenSea, the company updated and expanded its internal insider trading policies, in an effort to persuade the jury that no company policy in place during Chastain’s employment specifically barred his conduct.</p>  <p>Such presentations by Chastain proved unavailing, however; on May 4, 2023, the jury returned its verdict that Chastain was guilty of wire fraud as well as money laundering.<a href="#_ftn15" name="_ftnref15" title="">[15]</a></p>  <h5>Conclusion</h5>  <p>The outcome of this case demonstrates a deft approach by the government to preventing digital asset insider trading activities while bypassing the question of whether the underlying asset is a security. For that reason, digital asset companies should consider whether their business model warrants the implementation of insider trading policies and employee training programs designed to prevent digital asset fraud, irrespective of how digital assets are classified.</p>  <p>The BakerHostetler White Collar, Investigations, and Securities Enforcement and Litigation team and Blockchain Technologies and Digital Currencies team are composed of dozens of experienced individuals, including attorneys who have served in the Department of Justice and at the SEC. Our attorneys include a former U.S. attorney, former assistant U.S. attorneys, and branch and unit chiefs; partners who have served in the SEC’s Division of Enforcement and the SEC’s Office of the General Counsel; and attorneys with extensive experience in regulatory investigations, litigation, and enterprise compliance counseling. Please feel free to contact any of our experienced professionals if you have questions about this alert.</p>  <div> <hr /> <div id="ftn1"> <p><a href="#_ftnref1" name="_ftn1" title="">[1]</a> Pete Brush, <em>Former OpenSea Manager Convicted in NFT Homepage Fraud Case</em>, Law360 (May 3, 2023), https://www.law360.com/fintech/articles/1602380.</p> </div>  <div id="ftn2"> <p><a href="#_ftnref2" name="_ftn2" title="">[2]</a> Press Release, USAO, No. 22-180 (June 1, 2022), https://www.justice.gov/usao-sdny/pr/former-employee-nft-marketplace-charged-first-ever-digital-asset-insider-trading-scheme (SDNY Press Release).</p> </div>  <div id="ftn3"> <p><a href="#_ftnref3" name="_ftn3" title="">[3]</a> Def. Mot. to Dismiss Indictment,<em> U.S. v. Chastain</em>, No. 22-CR-00305 (S.D.N.Y. Aug. 19, 2022), ECF No. 19.</p> </div>  <div id="ftn4"> <p><a href="#_ftnref4" name="_ftn4" title="">[4]</a> <em>U.S. v. Chastain</em>, No. 22-CR-00305, slip op. at 5 (S.D.N.Y. Oct. 21, 2022), ECF No. 39 (citing <em>U.S. v. Alfonso</em>, 143 F.3d 772, 776-77 (2d Cir. 1998); <em>U.S. v. Williams</em>, 504 U.S. 36, 54 (1992)); SDNY Press Release, <em>supra </em>note 2.</p> </div>  <div id="ftn5"> <p><a href="#_ftnref5" name="_ftn5" title="">[5]</a> Indictment at 6 ¶ 13, May 31, 2022, ECF No. 1</p> </div>  <div id="ftn6"> <p><a href="#_ftnref6" name="_ftn6" title="">[6]</a> Def. Mot. to Dismiss Indictment, Aug. 19, 2022, ECF No. 19; Pl. Resp. to Def. Mot. to Dismiss Indictment at 11, Sept. 7, 2022, ECF No. 23; <em>see also</em> 18 U.S.C. 1343.</p> </div>  <div id="ftn7"> <p><a href="#_ftnref7" name="_ftn7" title="">[7]</a> <em>U.S. v. Chastain</em>, No. 22-CR-00305, slip op. at 4-5 (S.D.N.Y. Oct. 21, 2022).</p> </div>  <div id="ftn8"> <p><a href="#_ftnref8" name="_ftn8" title="">[8]</a> Id. at 3 (citing <em>Carpenter v. U.S.</em>, 484 U.S. 19, 26 (1987) (“Confidential information <em>acquired or compiled</em> by a corporation in the course and conduct of its business is a species of property”) (emphasis added) (internal quotation marks omitted); <em>U.S. v. Mahaffy</em>, 693 F.3d 113, 127 (2d Cir. 2012) (noting that the viability of the government’s wire fraud theory required proof that the victim businesses “had exclusive use of the . . . information, considered that information to be confidential, and . . . treated it as such”)).</p> </div>  <div id="ftn9"> <p><a href="#_ftnref9" name="_ftn9" title="">[9]</a> Indictment at 7 ¶ 15, May 31, 2022, ECF No. 1.</p> </div>  <div id="ftn10"> <p><a href="#_ftnref10" name="_ftn10" title="">[10]</a> Def. Mot. to Dismiss Indictment at 3, Aug. 19, 2022, ECF No. 19.</p> </div>  <div id="ftn11"> <p><a href="#_ftnref11" name="_ftn11" title="">[11]</a> Pl. Resp. to Def. Mot. to Dismiss Indictment at 27-28, Sept. 7, 2022, ECF No. 2.</p> </div>  <div id="ftn12"> <p><a href="#_ftnref12" name="_ftn12" title="">[12]</a> <em>U.S. v. Chastain</em>, No. 22-CR-00305, slip op. at 2-4 (S.D.N.Y. May 3, 2023), ECF No. 127.</p> </div>  <div id="ftn13"> <p><a href="#_ftnref13" name="_ftn13" title="">[13]</a> Brush, <em>supra </em>note 1.</p> </div>  <div id="ftn14"> <p><a href="#_ftnref14" name="_ftn14" title="">[14]</a> Id.</p> </div>  <div id="ftn15"> <p><a href="#_ftnref15" name="_ftn15" title="">[15]</a> <em>U.S. v. Chastain</em>, No. 22-CR-00305, slip op. at 5 (S.D.N.Y. May 4, 2023), ECF No. 128.</p> </div> </div>




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Jury Finds Former NFT Marketplace Manager Guilty of ‘Insider Trading’ Wire Fraud Scheme and Money Laundering

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