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OpenSea Employee Charged With Insider Trading in NFTs (reuters.com) 60

Posted by msmash from the how-about-that dept.
U.S. prosecutors in Manhattan on Wednesday unveiled an indictment accusing a product manager at OpenSea, the largest online marketplace for non-fungible tokens, of insider trading. From a report: Nathaniel Chastain was accused of secretly buying 45 NFTs based on confidential information that they would soon be featured on OpenSea's home page, and later selling them at a profit, typically two to five times what he paid. According to an indictment filed in Manhattan federal court, the scheme ran from June to September 2021, and Chastain transacted through anonymous digital currency wallets and accounts at OpenSea. Chastain was arrested this morning in New York, New York and will be presented today in the United States District Court for the Southern District of New York. He is charged with one count of wire fraud and one count of money laundering, each of which carries a maximum sentence of 20 years in prison.
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OpenSea Employee Charged With Insider Trading in NFTs More

OpenSea Employee Charged With Insider Trading in NFTs

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  • Not a security, so not insider trading (Score:3, Interesting)

    by mveloso ( 325617 ) on Wednesday June 01, 2022 @12:24PM (#62583836)

    FTA: "Chastain was charged with wire fraud and money laundering"

    Really, that's going to be tough case. It's not a security, so it doesn't really fall under securities laws. Money laundering? Wire fraud? Not really. Was all of his stuff declared? If so, there's nothing there.

    • well take the deal and don't do fpmiap time or risk it in jury trail.

    • Well you don't get an indictment unless you can convince at least a judge and grand jury that there's enough evidence and legal merit to a charge that it's worth the court's time.

      So if it really was as easy to dismiss as you suggest, it probably would have been.
      =Smidge=

      • Yeah, I'm with you on this. I think it's not a stretch to convince a jury that inside information was used to trade something of value to make illicit gains.

        • I think it's not a stretch to convince a jury that inside information was used to trade something of value to make illicit gains.

          Inside information... check.
          Something of value... TBD.

          I know there are people out there willing to pay for NFTs, and some definitions of value are based on what people are willing to pay for a thing. However, you could also make the argument that everyone involved is simply hoping for a bigger fool to come after them, a pyramid of scammers hurting would-be scammers, and nothing o

          • Re: (Score:1)

            by rgmoore ( 133276 )

            I know there are people out there willing to pay for NFTs, and some definitions of value are based on what people are willing to pay for a thing.

            This is the definition courts tend to use, so it's completely applicable in this case. Courts tend to favor the concrete over the abstract, if for no other reason than to avoid getting bogged down in philosophical arguments. If you can exchange those NFTs for money, or for a cryptocurrency that can easily be converted into money, the courts will treat them as a

      • Well you don't get an indictment unless you can convince at least a judge and grand jury

        Grand jury, yes, but I don't think that a judge is required to sign off on an indictment. A judge might dismiss once it comes to court.

        It's also said that most prosecutors could get a grand jury to indict a ham sandwich.

        • > Grand jury, yes, but I don't think that a judge is required to sign off on an indictment.

          You don't get in front of a grand jury until you convince a judge there's enough merit in the case to proceed...
          =Smidge=

    • Re: (Score:3, Insightful)

      by peppersmgaik ( 9878344 )
      Actually the SEC says that if crypto coins or digital assets are traded on an exchange, then they consider them a security. I'm not familiar with previous cases or if precedent has been set for this yet but I hope the case sticks. This is about as black and white insider trading as you get, it would be a failure of our legal system to let him off over a technicality, and if that does happen then hopefully the loophole will be closed before more people defraud the public.

    • Re: (Score:3)

      by mysidia ( 191772 )

      It's not a security, so it doesn't really fall under securities laws.

      No.. this is currently the subject of a SEC probe, and thus it is Not definitively true that they will not be considered securities - if the SEC deems it passes the "Howley Test," then it will be considered a security.

      Many types of NFTs marketed as investments can possibly be deemed as securities - if it happens, then the likely result will be hundreds of millions of dollars in fines Per security against whoever originally created and

    • Link to DOJ press release and indictment (Score:5, Informative)

      by ISayWeOnlyToBePolite ( 721679 ) on Wednesday June 01, 2022 @12:54PM (#62583930)

      https://www.justice.gov/usao-s... [justice.gov]

      https://www.justice.gov/usao-s... [justice.gov]
        âoeNFTs might be new, but this type of criminal scheme is not. As alleged, Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself. Todayâ(TM)s charges demonstrate the commitment of this Office to stamping out insider trading â" whether it occurs on the stock market or the blockchain.â

    • Not at all. Wire fraud and money laundering are not securities laws.

      Wire fraud statutes [investopedia.com] call for 1) the defendent intentionally and voluntarily devised or participated in a scheme to defraud another out of money and 2) that some form of electronic communication was used. A Nigerian prince scheme is wire fraud and has nothing to do with securities.

      And by using anonymous wallets as part of this scheme, he was money laundering as the intent was to make illegitimate gains appear to come from legitimate

      • Obviously his wallets weren't anonymous, as they were able to track them. They're trying to say using a bitcoin wallet is automatically a sign that you're up to no good:

        "To conceal the fraud, CHASTAIN conducted these purchases and sales using anonymous digital currency wallets and anonymous accounts on OpenSea"

        That's overstating the "anonymous" idea.

        As to wire fraud: who was defrauded exactly?

        • Bitcoin wallet? C'mon, man.
        • What is your agenda here? Because you're confusing your opinion, severely misinformed at that, with the facts.

          He used anonymous wallets to hide who he was, someone with insider knowledge about what was going to be features. He used his insider knowledge to buy NFTs at a low price, defrauding the original owner, and selling them at a high price when they were featured on the exchange of which he had unique knowledge of. that defrauds the original owners from missing out on the eventual value of the NFT

      • Who was defrauded though? The company? The degenerates who trade on that platform? I don't see how.
      • By that logic, one could argue every time a shopkeeper buys a pallet of goods at wholesale cost, posts an advertisement about the goods, and sells them to customers at retail cost, then they have defrauded the consumer.

    • Re: (Score:1)

      by mm4902 ( 3612009 )
      Securities law is written for Boomers, your Krypto The Super Doge stuff doesn't count.
    • I think the wire fraud case looks very easy to convict on.

      The NFT creator and the NFT purchaser lost money in a way that was not disclosed to them by Opensea, due to the actions of an employee that were not sanctioned, nor part of his contract or their contracts. Likely Opensea has suffered due to reputational damage as well.

      There is a long legal precedent about this kind of fraud in traditional businesses, which this likely covers already.

      The legal definition of fraud, i.e. all the elements needed to le

    • Thank you, I was genuinely confused about how some monkey pics were somehow regulated by the SEC now.
    • If Chastain thought it was legal then he made himself look guilty with the attempts to obfuscate the purchases and only speculate on the soon to be featured NFTs .

  • But it's not a security... (Score:3)

    by Arethan ( 223197 ) on Wednesday June 01, 2022 @12:25PM (#62583842) Journal

    How can you insider trade a math problem? /s

    • Same way as its insider trading when you know how a whale quant stock trading algorithm will purchase stocks, before it happens. It boils down to market manipulation.
      • That's not the same at all. Stock trading is exactly securities, and the laws about insider trading actually apply to them. NFTs are not securities, so the laws about securities (Insider trading laws) would not apply.

        It might be successful if construed as fraud, but honestly saying that "The bitcoin wallet didn't have his name on it so he was trying to hide" is a thinly-veiled attempt to demonize cryptocurrency as wallets generally aren't identified to a person.

  • He was charged with wire fraud and money laundering. Though I'm honestly not clear on what he did that was illegal. NFTs seem to be largely unregulated, as are the crypto token/coins involved. Short of possible tax evasion, what did this guy do that was illegal?

    • I can see the wire fraud probably.. He declared he was positioning a product in manner ABC, but was actually deceptively doing it in manner XYZ that was beneficial to himself.

    • Re: (Score:1)

      by rgmoore ( 133276 )

      The only question is whether NFTs are a security that would be covered by insider trading laws. All the other facts are correct for an insider trading case: the defendant was clearly an insider, and he appears to have profited making trades based on his insider knowledge. The SEC has a very strong reason to want to make this case, both to catch this particular person and to make the general case the NFTs are subject to their regulation.

  • Serious question... (Score:3)

    by Pollux ( 102520 ) <speter@@@tedata...net...eg> on Wednesday June 01, 2022 @12:40PM (#62583878) Journal

    Can you legally claim it was insider trading when the NFT market is completely unregulated? Can they even legally define an NFT as an asset, when any educated individual knows it's literally nothing more than a URL recorded to a hashed, encrypted database containing a digital signature?

    All that being said, this is what happens in an unregulated marketplace trading digital snake oil. The entire industry is a criminal Ponzi scheme bubble that's about to burst. Everyone currently in on the scheme is either a fool or is in search for a bigger fool to sell their foolish assets to.

    • Can you legally claim it was insider trading when the NFT market is completely unregulated?

      Short answer: Yes.

      Long answer: Most definitively, yes.

      • Were there any insider tulip convictions? I don't think there were.
        • What? The Tulip Mania in denmark was about over-speculation on a highly popular but ultimately not as valuable commodity. That wasn't an insider trading scheme. That was more of a socio economic situation rather than frau.

    • Re: (Score:2)

      by splutty ( 43475 )

      The fact it happened with NFTs is actually wholly irrelevant to the case. It could've been potatoes. Or office paper clips.

      He used inside information (working for the company) to buy (not in his own name) things that he then later sold for profit (in his own name).

      That's pretty much the definition of insider trading.

      • So if I use my inside information at Walmart, about an upcoming sale on paperclips, to save money on paperclips... I can expect to go to FPMITA prison for that?
        • I think your example is not a good approximation of the actual crime.

          There are several key differences - paperclips are a commodity, and one paperclip is not like another. A link on the blockchain is (in theory) unique and there is no other. The NFT creator and the NFT purchaser lost money in a way that was not disclosed to them by Opensea.

          As innocent customers (the NFT creator and NFT purchaser) lost money to this scheme, much more than in your paperclip example, the government picks and chooses its pros

          • You're wrong about a couple of things. The creator made money. Royalties were paid to him. The purchaser may or may not have lost money, but they take that risk anyway. You can't make it illegal for opensea employees to buy and sell NFTs any more than you can make it illegal for Ebay employees to buy and sell funko pops. Knowledge of what's going to be on the front page next week doesn't mean shit.

            Look, every fucking zoomer on the planet thinks he knows something nobody else knows and they're all trading N
    • I've lost track of how many times "This is the year crypto completely crashes!" has been said. I've similarly lost track of is how many times "This is the Year of the Linux Desktop!" has been said.

      See y'all in 10 years suckers!

  • They were scamming on a scam?

  • It doesn't matter if it's a security (Score:1)

    by Anonymous Coward

    It doesn't matter if it's a security or not. Bid rigging is illegal, isn't it? If the SEC doesn't get him, somebody else will; possibly state or federal trade regulations?

  • I am flabbergasted and absolutely surprised by this totally unexpected development!

  • Organized crime employers and employees commit crimes.

    I told them they should do "legitimate" work, but they prefer to be wealthy instead.

    Go figure! :P

  • Given that I made nft, put some gems inside the secret sauce and watched the market fail to purchase any of the nft's, I might have a case against the opensea bastards. The money from the opensea markets went to inside trading criminals, and thus there was no money left for ordinary copyright owners/authors of non-fungible market participants, which mostly explains the failure to sell our nft's. I wonder how much damage awards I might be receiving when this lawsuit is going to judge's table?

  • Regulation is creeping in. We may yet see this crap getting stopped.

  • Probably the first of many, as the crackdown starts.

    The shitstorm of UST/Luna is a wake-up call that was way too long in the making, as the entire "cryptocurrency" situation is totally out of control.

    We have transparent examples of all the worst of speculation happening day in, day out, with next to no regulation at all.

    DeFi is about to get smacked HARD in a market that is clearly headed downward - and although I hate to admit it, having no great love for the "legal" fraudsters that run our monetary systems

  • and other governmental offices and their family members are allowed to insider trade
  • than selling NFTs in the first place
  • First NFT are not legally securities (at least not yet), therefore this does not fall under insider trading laws. Even the actual jury charges (https://www.justice.gov/usao-sdny/press-release/file/1509701/download) liken NFT's to artwork, rather than securities.

    What the guy did wrong here was he chose the NFT's that he anonymously owned to be featured on the home page of his employer's website, which it sounds like it was his actual job there. He obviously took advantage of his position, but I'm not sure

  • Get some popcorn. This could be interesting.

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