New York Federal Prosecutors Indict Defendant In Connection With NFT Insider-Trading Scheme

• Published date: 13 September 2022
• Subject Matter: Government, Public Sector, Criminal Law, Technology, Money Laundering, White Collar Crime, Anti-Corruption & Fraud, Fin Tech
• Law Firm: Foley Hoag LLP
• Author: Ms Shrutih Tewarie, Allen Thigpen and Jiun-Wen Bob Teoh

Federal prosecutors from the Southern District of New York recently charged Nathan Chastain with wire fraud and money laundering in connection with a purported scheme to illegally profit from sales and purchases of Non-Fungible Tokens ("NFTs").¹ This landmark criminal case marks the first time federal prosecutors have pursued criminal action to police insider trading in the NFT marketplace.

Chastain is a former employee of Ozone Networks, Inc. d/b/a OpenSea ("OpenSea"), the largest online marketplace for the purchase and sale of NFTs, and allegedly used confidential information about which NFTs were going to be featured on OpenSea's homepage for his personal financial gain. Chastain was responsible for selecting NFTs to be featured on OpenSea's homepage, and OpenSea kept confidential the identity of featured NFTs until they appeared on its homepage.² After an NFT was featured on OpenSea's homepage, the value of that NFT, and other NFTs made by the same creator, typically increased substantially.³ The government alleges that Chastain was aware of this fact and used his confidential business information concerning which NFTs would be featured to purchase dozens of NFTs under an anonymous account shortly before they were featured. Once the value of the NFTs Chastain purchased had increased from their exposure on OpenSea's homepage, Chastain would allegedly resell those NFTs for a significant profit.⁴

On August 19, 2022, Chastain filed a motion to dismiss the indictment. Chastain argues that the government's wire fraud theory of insider trading does not apply in this context because insider trading requires trading in securities or commodities.⁵ Because they have no connection to the financial markets, Chastain contends, NFTs are neither. In addition, Chastain argues the government's wire fraud charge cannot succeed because it requires the government to establish, inter alia, money or property as the object of a scheme or artifice to defraud, and the confidential information he allegedly misappropriated did not constitute "property," but instead consisted of a "marketing concept" which was "devoid of any inherent economic value and based on [his] unspoken personal thoughts."⁶ Chastain also argues that the money laundering count must be dismissed because it requires a showing that he attempted to conceal his alleged fraud. Here, all of the movements and transactions were conducted on the Ethereum blockchain, and thus were visible to the public. According to...