On June 1, the United States Attorney for the Southern District of New York (“SDNY”) and the New York Field Office of the Federal Bureau of Investigation (“FBI”) unsealed an indictment charging Nathaniel Chastain, a products manager at OpenSea,[1] with one count of wire fraud and one count of money laundering for his alleged insider trading of Non-Fungible Tokens (“NFTs”).[2] Capitalizing on the rise in NFT popularity, Chastain allegedly utilized his role in selecting NFTs to be featured on the OpenSea home page to guide NFT trading for his own financial benefit. Chastain would purchase specific NFTs before they were featured on the OpenSea home page, knowing the NFTs were about to be featured. After an NFT was featured its price typically rose considerably, at which point Chastain would sell the NFTs for significant profit.[3]
This case marks the federal government’s first indictment of insider trading of a digital asset.[4] Traditionally, “insider trading” involves unlawful trading of securities, and, as a result, the government typically charges insider trading under the Securities Exchange Act of 1934 (“Exchange Act”). But Chastain involves “insider trading” of an NFT, a digital asset that may not be a security.[5] In what is likely an effort to avoid litigating whether an NFT is a security, the government has brought charges against Chastain under the wire fraud statute, 18 U.S.C. § 1343, as opposed to the Exchange Act pursuant to 15 U.S.C. § 78j and 17 C.F.R. § 240.10b-5.
But attempting to bring this case under the federal wire fraud statute could pose other challenges for the government. Importantly, wire fraud under 18 U.S.C. § 1343 makes it a crime to effect “any scheme or artifice to defraud or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.”[6] The Supreme Court has articulated that the federal wire fraud statute is “limited in scope to the protection of property rights” and that the object of the fraud must be money or property.[7]
Due to these limitations, the government has recently faced a series of setbacks regarding what can be construed as a scheme to obtain money or property under Title 18 wire fraud. In Kelly v. United States, commonly known as the “Bridgegate” decision, the Supreme Court held that a politically motivated scheme to limit access to a bridge was an “exercise of regulatory power,” not a scheme to obtain the government’s property. Further, although the scheme cost government employees time and labor, the Supreme Court held that the labor costs were merely an incidental byproduct of the scheme, not the goal of the fraud, and thus also could not be the deprived of “property” under the wire fraud statute.[8]
Kelly called into question other wire-fraud-based insider trading charges alleging schemes not involving typical, securities-related material nonpublic information. For instance, in United States v. Blaszczak, the Second Circuit initially held that the misappropriation of a government agency’s confidential information on Medicare reimbursement rates in order to make unlawful securities trades was an actionable scheme to deprive the agency of its property rights in that confidential information.[9] In doing so, the Circuit relied partly on Carpenter v. United States,[10] which held that confidential business information is in fact a property right.[11] But Kelly raised an issue as to whether the agency’s confidential information regarding reimbursement rates is “property” or merely an “exercise of [government] regulatory power” that cannot be property in and of itself.[12] Consequently, defendants appealed the Second Circuit’s decision in Blaszczak to the Supreme Court, and the Supreme Court vacated and remanded the case for reconsideration in light of its decision in Kelly.[13]
Of course, Chastain does not involve a government agency’s confidential information. But Kelly and the subsequent overturning of Blaszczak highlight the trouble with using wire fraud as a means of charging insider trading cases where the scheme to deprive one of money or property is atypical or unclear.
Applied to Chastain, several questions arise: what money or property did Chastain seek to obtain and from whom? Based on the indictment,[14] the government’s theory appears to be that Chastain’s scheme deprived OpenSea of its exclusive property right in confidential business information regarding featured NFTs. But the government does not allege that Chastain ever disclosed this information to others, and it is difficult to discern how Chastain’s actions harmed the company. The more logical victim may be OpenSea’s customers, but Chastain arguably owed customers no duty of loyalty and did not deprive them of any money or property. The government’s ability to successfully bring its first insider trading case involving a digital asset under the wire fraud statute will likely turn on resolving these difficult issues.[15]
Chastain has gained considerable media attention, as it indicates that the trading of and market for NFTs are not exempt from governmental and prosecutorial scrutiny. Beyond this general observation, though, the outcome of this case stands to resolve two key inquiries: (1) whether the government will be able to successfully bring a wire fraud charge against a defendant accused of insider trading, despite the “money or property” roadblocks evident in Kelly and Blaszczak; and relatedly (2) whether Chastain presents a viable new theory of liability for fraudulent trading in digital assets, without the need to resolve whether the digital asset in question is or is not a security.
***
To subscribe to the Debevoise Fintech Blog, click here.
We would like to give a special thanks to Debevoise summer associate Erin Munro for her contributions to this post.
***
[1] OpenSea is an NFT marketplace where account holders can buy and sell NFTs. OpenSea is currently the largest NFT marketplace by market share. See OpenSea, https://opensea.io/ (last visited June 17, 2022).
[2] NFTs are digital units of data stored on a blockchain and are a form of digital asset that can be sold or traded for value on a market.
[3] DOJ Press Release No. 22-180, Former Employee Of NFT Marketplace Charged In First Ever Digital Asset Insider Trading Scheme (June 1, 2022), https://www.justice.gov/usao-sdny/pr/former-employee-nft-marketplace-charged-first-ever-digital-asset-insider-trading-scheme; see also Indictment, U.S. v. Chastain, 22-cr-305 (2021), https://www.justice.gov/usao-sdny/press-release/file/1509701/download (explaining Chastain’s alleged scheme).
[4] Id.
[5] Byungkwon Lim, Gary E. Murphy, & Anna V. Maximenko, WebCast – Non-Fungible Tokens: an Introduction to NFTs, NFT Marketplaces and Related Issues, Debevoise & Plimpton FinTech Blog (Mar. 1, 2022), https://www.debevoisefintechblog.com/2022/03/01/non-fungible-tokens-an-introduction-to-nfts-nft-marketplaces-and-related-issues/.
[6] 18 U.S.C.A. § 1343 (emphasis added).
[7] See Kelly v. United States, 140 S. Ct. 1565, 1566 (2020) (citing McNally v. United States, 483 U.S. 350, 360 (1987)).
[8] Kelly, 140 S. Ct. at 1568–69.
[9] United States v. Blaszczak, 947 F.3d 19, 34 (2d Cir. 2019).
[10] See generally Carpenter v. United States, 484 U.S. 19 (1987).
[11] Blaszczak, 947 F.3d at 32.
[12] Andrew J. Ceresney, Matthew E. Kaplan, Charu A. Chandrasekhar, & Arian M. June, Second Circuit Set to Revisit Insider Trading Decision Post-Bridgegate (Jan. 19, 2021), https://www.debevoise.com/insights/publications/2021/01/second-circuit-revisits-insider-trading.
[13] Blaszczak v. United States, 141 S. Ct. 1040, 1040 (2021).
[14] United States v. Chastain, 22-CR-305 (S.D.N.Y. 2022) ECF No. 1 at ¶¶ 10, 12.
[15] In a recent hearing, Chastain signaled an intent to move to dismiss the charges. See Pete Brush, Greenberg Team Set To Attack Feds’ NFT Insider Trading Case, Law360 (June 15, 2022), https://www.law360.com/articles/1503332.
