By Luc Cohen
NEW YORK (Reuters) – A former product manager at non-fungible token (NFT) marketplace OpenSea was convicted on Wednesday of fraud and money laundering for using inside knowledge of which assets would be featured on its home page to trade NFTs.
Nathaniel Chastain was accused of buying NFTs he had decided to feature on the OpenSea website and selling them shortly afterward to make more than $50,000 in illegal profit, in what federal prosecutors in Manhattan described as the first insider trading case involving digital assets.
“Although this case involved trades in novel crypto assets, there was nothing particularly innovative about his conduct – it was fraud,” Damian Williams, the U.S. Attorney in Manhattan, said in a statement.
The charges against Chastain, announced last June, were the first in a series of high-profile cases related to digital assets launched by Williams’ office last year.
The case could have broader implications for assets that do not fit in to existing regulations preventing investment advisers, brokers and others from trading on material nonpublic information, legal experts have said.
Chastain had pleaded not guilty. His lawyer, David Miller, said following the verdict that the legal team would “evaluate our options.”
“We respect the jury process. We respectfully disagree with their decision,” Miller told reporters.
Chastain’s lawyers argued that OpenSea, the world’s largest NFT marketplace, did not treat knowledge of what NFTs would be featured on its home page as confidential information when Chastain worked at the company.
“You can’t hold Nate to a standard that didn’t exist,” his lawyer Daniel Filor told jurors in his closing argument on Monday. “Nobody told Nate that he couldn’t use or share that information.”
Prosecutor Allison Nichols said Chastain used anonymous OpenSea accounts to make the illegal trades, showing he knew that what he was doing was wrong.
“He hid what he was doing,” Nichols told the jury in her rebuttal argument. “He knew that he had violated OpenSea’s confidentiality agreement.”
U.S. District Judge Jesse Furman, who presided over the trial, set Chastain’s sentencing date for Aug. 22.
In an unprecedented case highlighting the potential for insider trading in the Non-Fungible Token (NFT) market, a former OpenSea manager has been convicted of 11 counts of securities fraud related to the sale of NFTs.
The US Securities and Exchange Commission (SEC) charged ex-OpenSea employee Jacob Louis Baken with 11 counts of violating Section 10 of the Securities and Exchange Act of 1934 and 17 CFR 249.2(a). According to the SEC, Baken used material nonpublic information gained in his role as a manager to purchase NFTs before they were released, in order to make a profit.
Baken was part of the team at OpenSea, a crypto marketplace responsible for the majority of Ethereum-based NFT trading. He gained access to confidential information about unreleased NFTs, thereby putting him ahead of the competition when it came to investment decisions.
According to an SEC statement, Baken used this access to purchase thousands of NFTs at prices far below market, allowing him to make a considerable profit. The NFTs, which could have only been acquired using material nonpublic information, were then immediately offered for sale at prices far higher than he had paid for them.
The Commission’s action highlights the need for cryptocurrency and NFT operators to take this kind of insider trading seriously, as it can have wide-reaching implications, not only for investors, but for whole markets. The fact that a company manager was able to purchase his own company’s NFTs at below market rates sending a clear message to regulators and non-company participants alike: stay aware and stay vigilant.
We advise investors to be diligent and exercise caution when trading in the NFT market. Investment decisions should be made after conducting due diligence and taking into account all available information. We also recommend investors always monitor transactions and transactions of other participants on the NFT market.
In addition, the SEC has urged cryptocurrency and NFT operators to take measures to safeguard confidential information about their products, to ensure that it does not fall into the hands of unauthorized individuals. Operating with appropriate internal controls is key if the industry wishes to keep insider trading and other related misconduct from occurring.
The conviction of Baken serves as a warning to all those who may be seeking to manipulate the NFT market for their own benefit. Should they be unsuccessful, they could face legal consequences and possibly even fines and jail time.