Within months of bringing charges against two twenty-year-olds in connection with an NFT “rug pull,” the Department of Justice has brought charges of wire fraud and money laundering against Nate Chastain, former product manager at OpenSea, the largest NFT marketplace, for his alleged involvement in the “first ever digital asset insider trading scheme.”

Though “insider trading” is conspicuously not included as one of the charges (more on that below), the DOJ alleges Chastain violated the “duties of trust and confidence” he owed his employer, as well as the law, by using OpenSea’s confidential business information to make lucrative NFT trades and by attempting to conceal his trading activity.

Between May and September of 2021, Chastain’s job responsibilities included selecting and planning which NFT collections would be featured on OpenSea’s homepage; usually, the resulting publicity caused an increase in demand and value for those NFTs. According to the indictment, Chastain signed a written agreement acknowledging he was obligated to refrain from using this information except for the benefit of his employer or as necessary to perform his job duties.

Nonetheless, between June and September of 2021, Chastain allegedly purchased a total of around 45 NFTs from different artists or collections shortly before they were featured on OpenSea’s homepage, and typically sold them shortly after for between two to five times his purchase price. Chastain attempted to conceal his purchase of featured NFTs by using “anonymous” OpenSea accounts, rather than his publicly-known account, and by using multiple digital wallets (or “Ethereum accounts”) with no prior transaction history. In September of 2021, Chastain resigned from OpenSea after users on Twitter uncovered and called out his trading activity.

The DOJ alleges that Chastain’s alleged “scheme” to defraud, for purposes of obtaining money and property through false pretenses, supports the charge of wire fraud, and that the attempt to conceal his trading activity supports the charge of money laundering. It demands that Chastain forfeit all of the money and property constituting or derived from proceeds traceable to that trading activity.

Key takeaways:

  • Insider trading laws in the United States prohibit corporate officers, directors, and other “insiders” from using confidential business information to their advantage. These laws, which are enforced by the Securities and Exchange Commission, apply only to transactions involving stocks and other securities. While this case does not touch on whether NFTs are securities, it is noteworthy that the DOJ brought charges in connection with an alleged “insider trading scheme” involving NFT transactions.
  • In light of this action and the increased scrutiny into the Web3 space, companies, team leaders, and the industry as a whole should consider implementing, updating, and enforcing insider NFT trading policies. The more that the Web3 industry is able to self-regulate and demonstrate good behavior, the less that law and enforcement regulators will feel the need to intercede.
  • As we’ve previously warned, government agencies and regulators have the power to investigate, prosecute, and pursue legal action against alleged bad actors even in the so-called “wild west” of the Web3 ecosystem. This action proves, once again, that the absence of laws and regulations specifically referencing NFTs and Web3 do not impede enforcement; age-old laws against fraud, wire fraud, and money laundering are more than adequate.
  • The DOJ has the resources and ability to unwind complex transactions, follow the money, and unmask “anonymous” perpetrators. Using multiple digital wallets, or opening new digital wallets to conceal trading activity, can enhance criminal liability in connection with trading digital assets. The cover up is often worse than the underlying behavior.
  • Law enforcement is closely monitoring conversations surrounding the NFT market on social media, and may be quietly investigating other suspicious activity, especially when flagged by the Web3 community.

 

While this case does not touch on whether NFTs are securities, it is noteworthy that the DOJ brought charges in connection with an alleged “insider trading scheme” involving NFT transactions.

 https://outlook.office.com/mail/