The United States Attorney for the Southern District of New York and the Assistant Director-in-Charge of the New York Field Office of the FBI, announced today the unsealing of an Indictment charging Nathaniel Chastain with wire fraud and money laundering in connection with a scheme to commit insider trading in Non-Fungible Tokens, or “NFTs,” by using confidential information about what NFTs were going to be featured on [the marketplace] homepage for his personal financial gain. Chastain was arrested this morning in New York.
U.S. Attorney Damian Williams said:
“NFTs might be new, but this type of criminal scheme is not. As alleged, Nathaniel Chastain betrayed his employer by using its confidential business information to make money for himself. Today’s charges demonstrate the commitment of this Office to stamping out insider trading – whether it occurs on the stock market or the blockchain.”
As alleged in the Indictment:
This case concerns insider trading in NFTs on OpenSea, the largest online marketplace for the purchase and sale of NFTs. In violation of the duties of trust and confidence he owed to his employer, OpenSea, CHASTAIN exploited his advanced knowledge of what NFTs would be featured on OpenSea’s homepage for his personal financial gain.
As part of his employment, CHASTAIN was responsible for selecting NFTs to be featured on OpenSea’s homepage. OpenSea kept confidential the identity of featured NFTs until they appeared on its homepage. After an NFT was featured on OpenSea’s homepage, the price buyers were willing to pay for that NFT, and for other NFTs made by the same NFT creator, typically increased substantially.
From at least in or about June 2021 to at least in or about September 2021, CHASTAIN used OpenSea’s confidential business information about what NFTs were going to be featured on its homepage to secretly purchase dozens of NFTs shortly before they were featured. After those NFTs were featured on OpenSea, CHASTAIN sold them at profits of two- to five-times his initial purchase price. To conceal the fraud, CHASTAIN conducted these purchases and sales using anonymous digital currency wallets and anonymous accounts on OpenSea.
FBI Assistant Director-in-Charge Michael J. Driscoll said:
“In this case, as alleged, Chastain launched an age-old scheme to commit insider trading by using his knowledge of confidential information to purchase dozens of NFTs in advance of them being featured on [the marketplace] homepage.
With the emergence of any new investment tool, such as blockchain-supported non-fungible tokens, there are those who will exploit vulnerabilities for their own gain. The FBI will continue to aggressively pursue actors who choose to manipulate the market in this way.”
Chastain 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. As always, the charges contained in the Indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.
It is interesting to note that there is no allegation that this is insider trading under securities law.
As this indictment shows, liability for improper trading can arise even if the NFT is not a security. These policies cover the types of activities addressed here and others such as “wash trades” and other improper trading designed to manipulate the price or trading volume of NFTs.