On July 21, 2022, the Department of Justice (“DOJ”) and the Securities Exchange Commission (“SEC” or the “Commission”) announced parallel actions against a former Coinbase product manager, his brother, and his friend for orchestrating a year-long insider trading scheme.[1] According to the agencies’ respective charging documents, Defendant Ishan Wahi used inside information gleaned from his employment at Coinbase to tip either his brother, Nikhil Wahi, or his friend, Sameer Ramani as to the timing of token listings on Coinbase’s platforms. As a product manager at Coinbase, one of the largest cryptocurrency exchanges in the world, Ishan Wahi was involved in the confidential process of listing new digital assets on its platforms. Wahi had advance knowledge of which digital assets Coinbase was planning to list and the timing of public announcements about those listings. According to the government, Wahi used this knowledge to tip his brother or Ramani so that they could acquire these digital assets shortly before the public announcement and sell after listing. The government alleges that as a result of this scheme, Nikhil Wahi and Ramani collectively generated gains totaling at least $1.5 million.[2]
DOJ Indictment
U.S. v. Wahi marks the first cryptocurrency insider trading scheme charged by the DOJ.[3] While noteworthy, it is actually the second case announced this summer involving the alleged insider trading of digital assets. Less than two months ago, on June 1, DOJ announced its first ever insider trading case involving NFTs, U.S. v. Chastain.[4] Taken together, the cases reflect a growing trend by DOJ of pursuing traditional financial fraud cases involving digital assets.
Chastain and Wahi share many similarities. Both cases involve an employee at a digital asset company whose position at the company afforded him confidential knowledge of an event likely to raise the asset’s price—in Chastain knowledge of when an NFT would be featured on the homepage of OpenSea, and in Wahi knowledge of a token listing on Coinbase’s platform. Both employees used that information to trade ahead of the relevant price-impacting event or tip relatives and friends. And, critically, while both indictments allege “insider trading,” both cases were charged under the wire fraud statute, 18 U.S.C. § 1343, rather than traditional securities fraud under the Exchange Act pursuant to 15 U.S.C. § 78j and 17 C.F.R. § 240.10b-5.[5]
In our prior post about Chastain, we noted that Chastain raises interesting questions as to whether wire fraud is a viable alternative theory of liability for insider trading in digital assets that avoids the need to resolve whether the asset in question is a security.[6] In hindsight, Chastain may have been a trial balloon for Wahi, which appears to push even further the theory of liability charged in Chastain. By choosing to charge Wahi and his co-conspirators under the wire fraud statute, as opposed to securities fraud, the DOJ again sidesteps the problem of establishing that the digital assets are securities, which the DOJ may view as a more difficult hurdle than questions regarding the wire fraud statute left unresolved by the Supreme Court’s “Bridgegate” decision.[7]
SEC Complaint
Unlike the DOJ, the SEC cannot avoid addressing whether an asset is a security; the agency may only pursue charges under the securities fraud statutes, which presuppose the existence of a security.[8] Thus, in order to bring an action against Wahi and his co-conspirators, the SEC was required to take the position that particular digital assets are securities—which it has been loathe to do beyond its piecemeal prosecutions of ICO promoters—and set about to prove the issue by a preponderance of the evidence. But this puts the government in a somewhat odd position, as two agencies with overlapping jurisdiction are bringing actions against the same conduct, but under two entirely different legal theories. What is more, one of these legal theories purposely avoids the very question the other legal theory must prove to be successful.
Further, by taking a position that certain token issuances were securities offerings without first providing the marketplace with a definitive framework for analysis, the SEC’s action may further obfuscate the issue of where the line is being drawn between security and non-security tokens. For example, the SEC’s complaint alleges that the co-defendants traded in at least 25 digital assets, but claims only that “at least nine” of these trades involved securities.[9] What is the Commission’s position with respect to the other 16 assets—does the agency contend that the remaining 16 are or are not securities? What guidance (if any) should the market take from the Commission’s inclusions and omissions in this regard? Also, what, in the SEC’s view, differentiates the nine tokens identified in the complaint from the other 16? The SEC’s silence on these issues sends uncertain signals to the market regarding the Commission’s assessment of the assets.[10]
In a similar vein, the SEC’s action raises questions about the legality of Coinbase’s (and countless other digital asset exchanges’) business model. The SEC’s categorization of at least some of the at-issue digital assets as securities would suggest that Coinbase (and numerous other crypto exchanges) is operating as an unregistered exchange in violation of the Exchange Act. Yet for nearly a decade the SEC has done nothing to prohibit Coinbase and the other crypto exchanges from operating. Indeed, more than a year ago, the SEC approved Coinbase’s Form S-1, allowing it to go public. In what was almost certainly not a coincidence, on the same day that the SEC announced its enforcement action, Coinbase announced a petition for the SEC to adopt rules identifying and regulating securities tokens.[11]
The effects of this action on this trillion-dollar industry are presently unknown. Despite the fact that the SEC’s action against Wahi and his co-defendants may have potentially profound implications for Coinbase, other crypto exchanges, and the issuers of the relevant tokens, none of these entities are party to the SEC’s action with the ability to litigate the characterization of the tokens at issue or their business practices.[12] Conversely, because none of these entities are defendants, it is unlikely that a finding in Wahi will have res judicata or estoppel effect on other market participants, including Coinbase. And although, reportedly, the SEC has also separately launched a probe into whether Coinbase improperly allowed trades of digital assets that should have been registered as securities, such an investigation or enforcement action does not address the implications of a decision in Wahi.[13]
Because of the many questions raised by the SEC’s insider trading charges against Wahi and his co-defendants, this case has sparked renewed criticism of the SEC’s approach to the policy challenges raised by the digital asset industry. Indeed, a sitting Commissioner of the CFTC publicly decried the Wahi case as a striking example of “regulation by enforcement,” arguing that regulation of the digital asset market is “best addressed through a transparent process that engages the public to develop appropriate policy with expert input—through notice-and-comment rulemaking pursuant to the Administrative Procedure Act.” [14]
Nevertheless, despite the controversy, Wahi and Chastain suggest that we will continue to see government agencies take a more aggressive stance against fraud involving digital assets in the coming months. Whether these cases stand to clarify or further muddle the status quo on digital assets remains to be seen.
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For more discussion and analysis of developments regarding insider trading of digital assets see our other post:
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[1] DOJ Press Release No. 22-232, Three Charged In First Ever Cryptocurrency Insider Trading Tipping Scheme (July 22, 2022), https://www.justice.gov/usao-sdny/pr/three-charged-first-ever-cryptocurrency-insider-trading-tipping-scheme; SEC Press Release No. 2022-127, SEC Charges Former Coinbase Manager, Two Others in Crypto Asset Insider Trading Action, (July 21, 2022), https://www.sec.gov/news/press-release/2022-127.
[2] See Indictment, United States v. Wahi, 22-cr-392 (2022), https://www.justice.gov/usao-sdny/press-release/file/1521186/download; SEC Complaint, U.S. v. Wahi, Case 2:22-cv-01009 (2022), https://www.sec.gov/litigation/complaints/2022/comp-pr2022-127.pdf.
[3] DOJ Press Release No. 22-232, supra note 1.
[4] See Byungkwon Lim, et al., Will DOJ’s First Ever Digital Asset Insider Trading Case Stick?, Debevoise & Plimpton Fintech blog (June 21, 2022), https://www.debevoisefintechblog.com/2022/06/21/will-dojs-first-ever-digital-asset-insider-trading-case-stick/.
[5] Id.
[6] Id.
[7] See Kelly v. United States, 140 S. Ct. 1565, 1566 (2020).
[8] See Sections 10(b), 21, 21A, and 27 of the Exchange Act, 15 U.S.C. §§ 78j(b), 78u, 78u-1, and 78aa (vesting the Commission with broad jurisdiction to regulate the securities markets and to bring actions for violations of the federal securities laws, including fraud and insider trading).
[9] See Compl. at ¶¶ 7, 89–94, SEC v. Ishan Wahi, et al., 22-cv-01009 (W.D. Wash. 2022).
[10] Some crypto exchanges have begun delisting the nine tokens identified by the SEC as being securities. See Turner Wright, Binance US will delist AMP following SEC claim token is a security (August 1, 2022), https://cointelegraph.com/news/binance-us-will-delist-amp-following-sec-claim-token-is-a-security.
[11] See Coinbase, Re: Petition for Rulemaking – Digital Asset Securities Regulation, SEC Petition (July 21, 2022), https://www.sec.gov/rules/petitions/2022/petn4-789.pdf.
[12] In response to the salvo of government activity involving Coinbase, the company posted a blogpost on July 21, 2022 titled, “Coinbase does not list securities. End of story.” See The Coinbase Blog, Coinbase does not list securities. End of story. (July 21, 2022), https://blog.coinbase.com/coinbase-does-not-list-securities-end-of-story-e58dc873be79.
[13] See Jaiveer Shekhawat, et al., Crypto exchange Coinbase faces SEC probe over securities (July 25, 2022), https://www.reuters.com/technology/coinbase-faces-sec-probe-over-cryptocurrency-listings-bloomberg-news-2022-07-26/; Haily Lennon, Coinbase Is Ready to Challenge The SEC (July 22, 2022), https://www.forbes.com/sites/haileylennon/2022/07/22/coinbase-is-ready-to-fight-the-sec/?sh=70bc27a77061.
[14] See CFTC Public Statements & Remarks, Statement of Commissioner Caroline D. Pham on SEC v. Wahi (July 21, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/phamstatement072122.
