A Crypto Quagmire: Civil And Criminal Charges Filed Against A Coinbase Manager For Insider Trading Of Securities

• Published date: 04 August 2022
• Subject Matter: Corporate/Commercial Law, Technology, Corporate and Company Law, Securities, Fin Tech
• Law Firm: Freeman Law
• Author: Mr Micah Miller

Recently the SEC filed suit for insider trading of securities against a high-level employee at the popular crypto exchange, Coinbase. The SEC filed its civil suit in Seattle on July 22, 2022, against and his co-conspirators. On the same day, the DOJ announced the unsealing of a federal indictment against the same defendants in the Southern District of New York.¹ The following discusses the allegations and draws conclusions regarding the implications for the crypto industry.

Both crypto exchanges and issuers of tokens, should take heed of this development. Beyond the intrigue and drama, the facts of the case are instructive regarding the legal quagmire faced by many crypto industry participants. The relevant coins appear to have been designed to avoid definition as a security. Apparently, Coinbase's due diligence and analysis agreed that the relevant tokens are not securities.

Many industry observers and participants are shocked. However, the SEC's press release firmly states that the SEC "is not concerned with labels" but instead focuses on "economic realities." In fact, the Securities Act and the Exchange Act and the cases interpreting those statutes furnish broad and sweeping definitions of investments that constitute securities. And unless Congress acts to modify the existing legal framework, doing business as usual may be akin to crossing a minefield for many crypto businesses.

Factual Background

Wahi leaked secret information to outside confidants regarding the prospective listing of at least 25 crypto assets on Coinbase who would then purchase large quantities of the tokens. Shortly after their listing, the group would sell the tokens, profiting quickly from the so-called "Coinbase bump" or "Coinbase effect," an increase in the token's trading value due to the additional liquidity from listing. The SEC complaint asserts that 9 of tokens traded by the co-conspirators are securities. It does not address whether the other digital assets may also qualify as securities.

The conspiracy was eventually discovered after a prominent crypto influencer tweeted information regarding a suspicious purchase in advance of a Coinbase listing. The tweet apparently led to a federal investigation and an internal investigation by Coinbase, which resulted in the discovery of the conspirators' conduct previously concealed by a "web of crypto accounts" and digital wallets, including under other people's names. The DOJ's press release noted Coinbase's assistance with the investigation. Both the indictment and the SEC complaint noted the efforts of Coinbase to implement an effective insider trading policy.

Things came rapidly unwound for Mr. Wahi and company when Coinbase's Director of Security Operations sent him a message asking him to meet with "legal" the next day in connection with the investigation. Instead of attending the meeting, Wahi lied about having had to fly home to India for family reasons. That same day, law enforcement apprehended him attempting to board a flight to India. He had a one-way ticket, three large suitcases, and lots of personal belongings.

Industry Concern

Although only Wahi and his co-conspirators are defendants, Coinbase and other...