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Tuesday, June 28, 2022

Ex-OpenSea executive sued for insider trading

The US Department of Justice revealed that Nate Chastain, a former OpenSea executive, was arrested in New York and was arraigned on Wednesday. The former product manager of the leading platform has been charged with wire fraud and money laundering . Accused of having taken advantage of insider information during his tenure, Nate Chastain now faces up to 20 years in prison.

A first in the cryptosphere

Nate Chastain’s arrest for insider trading is a first in the cryptocurrency ecosystem . US authorities said the former executive exploited inside information about planned listings of NFT collections on OpenSea. Based on these, Nate Chastain would have bought nearly 45 NFTs before they were tradable on the platform. Following this, the accused allegedly sold them for two to five times more than their purchase price.

According to the US Attorney in charge of the case, Damian Williams, Nate Chastain tried to cover up these actions by making his purchases using digital currency wallets and an anonymous OpenSea account .

Nate Chastain denies the charges against him. One of his lawyers, David Miller, said:

Mr. Chastain is not guilty of the charges brought against him. When all the facts are known, we are confident that he will be exonerated.

A legal vagueness

The indictment refers to insider trading as governed by the US Securities Act of 1934. The latter prohibits this type of trading in stocks and other financial securities. However, NFTs are not covered by this law .

This legal vagueness is not enough to taint the determination of the prosecutors. The latter have made it clear that they will not let this “technical detail” prevent them from using the federal fraud charge regime in the context of fraudulent practices in the NFT market.

On the other hand, the indictment for fraud does not mean that the NFTs are assimilated to transferable securities. Given this ambiguity, most of the charges against the accused relate to the illicit use of confidential information.

According to the indictment:

Chastain had an obligation to maintain the confidentiality of confidential business information received in the course of its work for OpenSea, and an obligation to refrain from using such information except for the benefit of OpenSea or as necessary to perform the work for OpenSea by joining OpenSea, Chastain signed a written agreement in which he acknowledged these obligations.

The other charge brought against Nate Chastain relates to money laundering . According to the latter, the accused tried to “hide and disguise” the proceeds of his alleged fraud through the use of anonymous wallets. The indictment also calls for the confiscation of the alleged fraudulently acquired NFTs.

American justice determined

Prosecutor Damian Williams claimed that although NFTs are relatively new, the Chastain case is not unprecedented . According to him: “As alleged, Nathaniel Chastain betrayed OpenSea by using his confidential business information to make money. Today’s charges demonstrate this office’s commitment to stamping out insider trading – whether it occurs in the stock market or on the blockchain.”

And indeed, the US Department of Justice and the Attorney’s Office for the Southern District of New York seem to be more interested in crimes and misdemeanors that occur in the crypto-economy . However, NFTs had previously gone unnoticed. Hence the surprise and confusion created following the announcement of Chastain’s arrest.

An opening of Pandora’s box?

This first could therefore lead to many new lawsuits . While legal charges are rare, fraud around non-fungible tokens is, on the other hand, legion. One of the most common is “wash trading”.

It consists of artificially increasing the value of an NFT by repeatedly selling the same work. This is not currently an illegal practice. Nevertheless, it is denounced by multiple aggrieved artists. Another fraudulent practice is to sell NFTs of works without the artist giving permission.

Regarding insider trading, the allegations are numerous. Various activities, which may amount to such a crime, are commonplace in the NFT market. Recently, Alexandre Arnault , son of the second world fortune Bernard Arnault, has been involved in questionable transactions.

The latter would have bought particularly rare NFTs, from HypeBear, before the rarity of their attributes were revealed to the general public. Their sale would have enabled him to generate a considerable profit . According to Convex Labs, the chance that the heir would buy these NFTs without prior knowledge of their exceptional rarity was 1 in 440,000. The person concerned denied the facts.

In addition, platforms such as Binance, FTX or Coinbase are currently facing charges of practices involving insider trading, according to the Wall Street Journal. The prosecution of Nate Chastain is nevertheless a first. Never before has a US court made an arrest for insider trading regarding a transaction involving crypto-assets.

OpenSea reacted and said: “When we learned of Nate’s behavior, we opened an investigation and ultimately asked him to leave the company. His behavior was in violation of our employee policies and in direct conflict with our core values ​​and principles.”

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