Former NFT Marketplace Worker Must Face Insider Trading Charges

Chris Dolmetsch, Bloomberg News

The Bored Ape Yacht Club non-fungible token (NFT) collection on the OpenSea marketplace on a laptop arranged in Hastings-on-Hudson, New York, U.S., on Sunday, April 10, 2022. The Bored Ape Yacht Club tokens, which have been limited to 10,000, have been at the forefront of the NFT craze, rising several times in value since their release in April 2021 and by 73% this year, according to CoinGecko, a cryptocurrency aggregator. Photographer: Tiffany Hagler-Geard/Bloomberg , Bloomberg

(Bloomberg) -- A former employee of OpenSea, the world’s largest NFT marketplace, lost a bid to dismiss insider trading charges in the first such case involving digital assets.

Nathaniel Chastain, a former product manager at OpenSea, was arrested in June on wire fraud and money-laundering charges. He was responsible for selecting NFTs that were to be featured on OpenSea’s homepage between June and September 2021, according to the government.

While the company kept the information confidential, Chastain secretly bought dozens of NFTs shortly before they were featured, selling them later for two to five times more than he paid, prosecutors said.

Chastain had asked US District Judge Jesse M. Furman to throw out the indictment, saying that NFTs aren’t securities or commodities and therefore aren’t subject to the government’s theory of misappropriation under the wire fraud law. He also argued that information he allegedly took is not “property” as required by the statute and that prosecutors can’t prove he committed money laundering because all the transactions at issue were done on the Ethereum blockchain.

Furman said Chastain’s argument that the NFTs are “property” may have some merit because the government may not be able to prove beyond a reasonable doubt that he used confidential business information, or that he tried to conceal his transactions while conducting them on a public blockchain.

But the judge rejected Chastain’s contention about the limits of the wire fraud law, because he isn’t accused of insider trading “in the classic sense of the term” and isn’t charged with securities fraud. Furman cited a Supreme Court case upholding the wire fraud conviction of a Wall Street Journal columnist who was found guilty of sharing details of upcoming columns with traders, saying that the court found that the publication and contents of the column were “property” in the meaning of the law.

“No court has suggested, let alone held, that conviction in such a case requires trading in securities or commodities,” Furman said, adding in a footnote that the term “insider trading” may be misleading and that the appropriate solution may be to strike the phrase from the indictment.

Chastain’s lawyers have already asked Furman to strike references to “insider trading” from the indictment, saying it “serves no legitimate prosecutorial purpose and is simply a means for the government to increase media attention and inflame the jury in this first-of-its-kind case in the digital asset space.”

David I. Miller, a lawyer for Chastain, declined to comment on Furman’s decision.

The case is USA v. Chastain, 22-cr-305, US District Court, Southern District of New York (Manhattan).

Read More: Ex-NFT Marketplace Employee Charged with Insider Trading

(Corrects name of defense lawyer in final paragraph of story originally published Oct. 21.)