The case against Nate Chastain shows how authorities could pursue ‘insider trading’ in crypto

Last week, a grand jury indicted Nathaniel Chastain, the former head of product of OpenSea, over what amounts to the first insider trading case in crypto.

But Chastain wasn’t indicted for insider trading — at least, not in the traditional sense.   

Chastain has been charged with wire fraud and money laundering related to actions that led to his dismissal from the non-fungible token platform in September of last year. What Chastain allegedly did looks a lot like insider trading or front-running, activities in which an insider uses non-public information to turn a profit.

He allegedly used secret Ethereum wallets to purchase NFTs based on confidential information that those assets would be featured on OpenSea’s homepage — positioning that can increase an NFT’s value. Chastain was privy to this information as head of product. 

From June 2021 to September 2021, the DOJ alleges he sold pieces for two to five times the initial purchase price after the value jumped from front-page features. 

When the activity came to light, OpenSea quickly requested that Chastain resign and opened an investigation into the activity. But many were left wondering if what he did actually broke any laws. 

As it turns out, authorities at the DOJ believe what Chastain did was indeed illegal. “NFT’s might be new, but this type of criminal scheme is not,” U.S. Attorney Damian Williams said at the time of Chastain’s arrest.

Gaps in crypto regulation present a challenge to building a traditional insider trading case.

The route the Department of Justice has taken to prosecute this case could illuminate how the government intends to go after crypto insider trading — an age-old fraudulent activity in a new realm that doesn’t fit neatly into existing laws.

Insider trading or not?

At the time Chastain’s alleged actions came to light, legal experts pointed out that it wasn’t really insider trading by the letter of the law. That charge technically constitutes a violation of securities laws. 

The facts of the case include an insider profited off of non-public information. But since NFTs are not currently codified as securities and Chastain’s alleged activities didn’t take place on a regulated broker/dealer platform or clearly touch activity tied to securities, it would be hard to make the case that Chastain violated securities laws.

To get around this, the DOJ went after Chastain on wire fraud and money laundering charges. 

“Possibly the most important thing about this case is that it doesn’t in any way depend on whether or not cryptocurrencies are securities,” said Jeffrey Alberts, head of Pryor Cashman’s White Collar Defense & Investigations practice and former federal prosecutor in the Southern District of New York (SDNY).

If the government’s approach, in this case, is successful, it could serve as a roadmap. 

“So this theory of insider trading can be applied to any token, any cryptocurrency token or really any digital asset period, whether it’s an NFT or whether it’s a token that is deemed to be a security or whether it’s a cryptocurrency token that is not a security and not a non-fungible token,” said Alberts.

The theory

The government’s charge that Chastain committed wire fraud is based on its argument that he “misappropriated information.”

At its core, wire fraud refers to obtaining money or property by fraud carried out through the use of the “wires” or wired communication. It’s the modern descendant of mail fraud, which is charged when a fraud utilizes the mail system, though most people favor wires over mail these days. 

The broad statute is incredibly adaptable when building a case. Still, it’s somewhat novel for wire fraud to be the standalone charge in a case like this. Usually, the charge is coupled with securities law violations or a companion case from the Securities and Exchange Commission (SEC). 

The government has in the past charged wire fraud for the misappropriation of information in a trading context. But according to legal experts, this case appears to be the first of its kind since it deals with an NFT exchange rather than a traditional public market. 

Crucially, the case positions OpenSea as the victim, according to Ian McGinley, former Co-Chief of the Complex Frauds and Cybercrime Unit in the U.S. Attorney’s Office for the SDNY and current partner at Akin Gump’s white-collar defense and government investigations practice. 

The crime, according to the government’s complaint, is that Chastain allegedly violated OpenSea’s policies by misappropriating private information for his personal gain. Essentially, Chastain is on the hook for violating his duty to his employer.

If OpenSea hadn’t had these policies and procedures in place, it would be much harder to bring these charges, according to McGinley. 

According to Alberts, it also raises questions for firms that don’t have a clear delineation between employee and employer. Here, OpenSea had a clear policy and distinction between the firm and Chastain as an employee. Other firms have smaller teams and lack clearly defined guidelines and procedures, which could leave them open to civil suits if this type of activity happens on their platforms or make it challenging to figure out where to point the finger if front-running occurs, said Alberts.  

Potential precedents

Since the case has just begun, it’s unclear how the government will continue to argue the case and it is too early to predict what kind of precedents the case may set.

It’s also possible that civil litigants will bring cases against this type of insider trading activity using similar arguments that the government has. Civil litigants might sue Chastain for harm related to his alleged scheme, for instance.

For now, McGinley said if a court finds that this type of case theory holds water, it’s likely the government will continue to use it in future enforcement actions aimed at crypto market participants.

“If the government is successful here, I think you're going to see more wire fraud prosecutions for insider trading,” he said. “And not just NFT exchanges, but cryptocurrency exchanges where there have also been reports of people kind of front running.”