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| 2 minutes read

First Ever NFT Criminal Insider Trading Charges

On June 1, 2022, an indictment was unsealed by federal prosecutors in the Southern District of New York charging Nathaniel Chastain, a former manager at a leading non-fungible token (“NFT”) platform, OpenSea, with insider trading in connection with the sale of NFTs.  Prosecutors allege that Chastain used material, non-public information about which NFTs would be marketed on the markeplace’s homepage to secretly purchase and sell those tokens for personal profit.

NFTs are a type of crypto asset in which each token is unique — as opposed to “fungible” crypto assets like Bitcoin, which are each worth the same amount.  NFTs are often used to authenticate ownership of an item, including digital art, music, and memorabilia.  

According to the indictment, Chastain was responsible for selecting which NFTs would be displayed on OpenSea’s homepage.  Notably, the display of an NFT on the marketplace’s homepage typically caused that NFT to significantly increase in value.  The indictment alleges that Chastain used the material, non-public information he possessed regarding which NFTs would be displayed on the marketplace's homepage to secretly purchase those NFTs minutes before they were displayed, and then sell them at two to five times Chastain’s purchase price shortly after the NFTs were displayed. Chastain is accused of buying and reselling roughly 45 NFTs in this manner.  The indictment further alleges that Chastain sought to hide his trading by using anonymous accounts and wallets to buy and sell the NFTs.  Chastain is charged with one count of wire fraud and one count of money laundering in connection with the scheme.

The United States Attorney for the Southern District of New York commented that the charges “demonstrate the commitment of this office to stamping out insider trading — whether it occurs on the stock market or the blockchain.”

It is noteworthy that the charges were styled as insider trading charges under the wire fraud statute, even though the United States Attorney explicitly referenced fraud on the stock market.  Federal prosecutors often bring insider trading charges under the securities fraud statutes parallel to a Securities and Exchange Commission (“SEC”) complaint alleging insider trading in violation of the securities laws.  These charges are often, but not always, filed nearly simultaneously.  The SEC has not yet weighed in on NFTs, but has made comments suggesting that some NFTs, particularly fractionalized NFTs, may be securities.  The fact that the federal prosecutors in the Southern District of New York did not charge securities fraud and that the SEC has not brought insider trading charges against Chastain suggests that the SEC is not, at this point, taking the position that the NFTs at issue here were securities.

This post was written by Mark Bini, Julia Nestor, Charles Hyun and Kaela Dahan. 


cryptocurrency, blockchain, regulatory & investigations