Case Update: NFT “Insider Trading” Case Cleared to Sue Ex-OpenSea Employee – FinTech
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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 the “insider trading” charges against him , paving the way for the US Department of Justice to continue its enforcement action.
As we previously reported, in June the DOJ sent shockwaves through the non-fungible token industry by filing wire fraud and money laundering charges against Nathan Chastain, claiming he had violated the law by participating in the “first-ever digital asset insider trading system.”
Chastain requested the dismissal of the Charge, arguing that the “confidential business information” he allegedly misused to profit from the buying and selling of NFTs was not OpenSea’s “property” within the meaning of the Wire Fraud Act. He further argued that the DOJ could not prove that he was engaging in money laundering because transactions on the Ethereum blockchain are public. Finally, Chastain argued that charges of wire fraud based on a “hijacking theory” are flawed because these charges require the trading of securities or commodities, and NFTs are neither. . For this argument, Chastain relied heavily on DOJ 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 concluded that Chastain’s arguments “have some force”, it concluded that it was up to a jury to decide at trial. In rejecting Chastain’s arguments, the Court held, as we noted earlier, that the DOJ had not actually charged him with insider trading as defined by securities law, so the Whether NFTs are securities is irrelevant here. The court explained in a footnote, however, that Chastain separately decided to strike the phrase “insider trading” from the indictment and bar the government from using it at trial. The Court reserved judgment on these matters, 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 with NFTs should consider implementing, to update, enforce and comply with NFT’s insider trading policies (such as the open source policy we prepared with Tim Ferriss).
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