On October 21, 2022, the United States District Court for the Southern District of New York issued an order denying a former OpenSea employee's motion to dismiss "insider trading" charges brought against him, clearing the way for the U.S. Department of Justice to proceed with its enforcement action.
As we previously reported, in June, the DOJ sent shockwaves through the non-fungible token industry by bringing wire fraud and money laundering charges against Nathan Chastain, claiming that he broke the law by participating in the "first ever digital asset insider trading scheme."
Chastain moved to dismiss the Indictment, arguing that the "confidential business information" he allegedly misappropriated to profit from the purchase and sale of NFTs was not OpenSea's "property" within the meaning of the wire fraud statute. He further argued that the DOJ could not prove that he engaged in money laundering because transactions on the Ethereum blockchain are public. Finally, Chastain contended that the wire fraud charges based on a "misappropriation theory" were deficient because those charges require trading in securities or commodities, and NFTs are neither. For this argument, Chastain relied heavily on the DOJ's references to "insider trading" in a press release and at the initial conference of his case.
The court has now denied Chastain's motion. Although the court found that Chastain's arguments "have some force," it concluded that they are for a jury to decide at trial. In rejecting Chastain's arguments, the Court reasoned, as we noted previously, that the DOJ did not actually charge him with insider trading as defined under securities law, so the question of whether NFTs are securities is of no consequence here. The court explained in a footnote, however, that Chastain has separately moved to strike the phrase "insider trading" from the Indictment and preclude the Government from using it at trial. The Court reserved judgment on those issues, noting that the motion has not yet been fully submitted for consideration.
As this case continues to develop (along with the DOJ's other NFT-related cases), companies, team leaders, DAOs, and others working in Web3 or dealing in NFTs should consider implementing, updating, enforcing, and complying with NFT insider trading policies (such as the open source policy we prepared along with Tim Ferriss).
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