First-Ever NFT Insider-Trading Case Heads to Trial

OpenSea is the largest online marketplace of nonfungible tokens. Photo: Ariel Zambelich/The Wall Street Journal
OpenSea is the largest online marketplace of nonfungible tokens. Photo: Ariel Zambelich/The Wall Street Journal


  • Former OpenSea employee accused of using confidential information to buy digital tokens

The first-ever trial involving alleged insider trading of digital tokens kicks off in a New York federal court Monday, a test of how the Justice Department applies age-old laws to a new and lightly regulated industry.

The defendant, Nathaniel Chastain, is a former employee of OpenSea, the largest online marketplace of nonfungible tokens, and his case turns on whether he used confidential information to purchase NFTs ahead of the company featuring them on its home page.

The Manhattan U.S. attorney’s office charged Mr. Chastain in 2022 with wire fraud and money laundering, alleging that in 2021 he used nonpublic OpenSea information to purchase NFTs and later sell them at a profit, knowing that their prices would increase after being featured. While federal prosecutors described Mr. Chastain’s alleged crimes as an insider-trading scheme, they didn’t bring traditional insider-trading charges, which involve securities or commodities violations.

Mr. Chastain has pleaded not guilty to the charges. His trial is expected to last one to two weeks.

The case comes as Damian Williams, the U.S. attorney for the Southern District of New York, and other prosecutors have ramped up scrutiny of the crypto industry, operating at times in gray areas of the law. Prosecutors have sought to target alleged conduct that would raise legal concerns if committed in connection with traditional financial products.

Manhattan federal prosecutors scored guilty pleas from two brothers charged last year with the first-ever insider-trading scheme involving cryptocurrency. One of the siblings, a former Coinbase Global Inc. employee, admitted to tipping off his brother and a friend to confidential information from his job about coming digital currencies the exchange planned to list. Prosecutors said the recipients used the information to trade on the currencies ahead of their listing. The case left unresolved important legal questions about whether some crypto assets can be considered unregistered securities.

Other high-profile cases have been more straightforward. In December, Mr. Williams’s office charged FTX founder Sam Bankman-Fried with criminal offenses tied to the collapse of his crypto exchange. The indictment included sweeping allegations of a global fraud scheme, but at the root of the case, Manhattan federal prosecutors accused Mr. Bankman-Fried of stealing billions of dollars from FTX customers. He has pleaded not guilty and is set to go to trial in October.

In the NFT case, lawyers for Mr. Chastain have said OpenSea, the alleged victim, suffered no harm as it received commissions on all the transactions cited in the indictment. They have also accused prosecutors of mischaracterizing Mr. Chastain’s alleged crime as insider trading to grab headlines. Federal regulators haven’t formally identified NFTs as either a security or a commodity, a necessary prerequisite for bringing formal insider-trading charges, they say.

The argument didn’t persuade U.S. District Judge Jesse Furman, who is presiding over the case. He shot down Mr. Chastain’s request to bar prosecutors from describing the alleged scheme as insider trading to jurors, saying in a ruling last week that the term wasn’t an inapt description of the allegations.

Judge Furman also agreed with prosecutors that confidential information can be considered property, a key element of the Justice Department’s fraud case, citing a 1987 Supreme Court decision in Carpenter v. United States, a fraud case involving a former Wall Street Journal columnist convicted of sharing nonpublic information about his column before publication. Mr. Chastain’s lawyers argued unsuccessfully that confidential information wasn’t property because it had no inherent economic value.

A lawyer for Mr. Chastain and a spokesman for the Manhattan U.S. attorney’s office both declined to comment for this article.

Brian Jacobs, a former federal prosecutor, said the charges have drawn attention because crypto has been largely unregulated and prosecutions testing the limits of the Carpenter decision don’t happen that often. There is also a question of whether the government is criminalizing conduct that should be treated as a workplace dispute, he said.

“It remains to be seen how the government will be able to explain why it’s involved in protecting a market it hasn’t been involved in protecting before," said Mr. Jacobs, a partner at Morvillo Abramowitz Grand Iason & Anello PC.

Eugene Ingoglia, a former federal prosecutor who is now a partner at Allen & Overy LLP, said the trial is likely to center on whether the information Mr. Chastain used was indeed confidential and restricted under the company’s policies.

“If it’s not clear that the information was supposed to be kept in confidence or treated in a certain way, then he can’t be convicted of deliberately perpetrating a fraud," Mr. Ingoglia said.

Prosecutors have said that OpenSea, which was founded in 2017, treated the information as confidential and that Mr. Chastain signed a confidentiality agreement when he started working for the company, which included a “protection of information" provision.

Lawyers for Mr. Chastain have argued that the information wasn’t confidential and relevant company rules weren’t clear.

“Not only were there no OpenSea policies, trainings, or compliance programs to inform employees of any restriction on trading featured NFTs, the government would have the jury believe that a generic confidentiality agreement, signed by newly hired employees, covered the conduct," the lawyers said in a filing.

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