Powers On… Insider Trading With Crypto Is Targeted – Finally! Part 2
This is the second part of my column on cracking down on insider trading involving crypto. In part one, I discussed the criminal indictment of Nathaniel Chastain, a former product manager at the OpenSea NFT marketplace. I also discussed the SEC's allegations against former Coinbase employee Ishan Wahi, his brother, and his friend, based on the "hijacking" theory of insider trading.
Powers On… is a monthly opinion column by Marc Powers, who has spent much of his 40-year legal career working on complex securities-related cases in the United States after a stint at the second. He is now an Adjunct Professor at Florida International University College of Law, where he teaches Blockchain & the Law.
Since United States v. O'Hagan of the Supreme Court in 1997, the misappropriation theory of liability for insider trading was explicitly recognized. Both before and after that date, the "misappropriation" of trade secrets or confidential information used in stock trading has been an active area of enforcement by the Securities and Exchange Commission and criminal prosecution.
Examples include a former Wall Street Journal writer in United States v. Winans of Hudson News magazine stand employees in Securities Exchange Commission v. Smath; a printer for a company that printed tender offer documents in Chiarella v. United States; and more recently, financial analysts in United States v. Newman and Salman v. United States. On the same date as the SEC filing against Ishan Wahi and his two associates, U.S. Attorney for the Southern District of New York unveiled a parallel indictment that charged those same three defendants with wire fraud and conspiracy to electronic fraud.
Informers who receive material, non-public, or confidential information from an informant violate insider trading rules if they know that the informant breached an obligation they owed to another and received some sort of personal benefit from reporting. The Supreme Court said in the 2016 Salman case that personal benefit need not be financial or pecuniary. The benefit requirement is satisfied by granting the gift of this information to a business relative or close friend.
Frankly, it's high time the SEC and US attorneys' offices focused on the real crimes and fraud. This is precisely what insider trading is: fraud. This is an unfair business advantage for someone who learns confidential information and markets it for economic gain and profit. But this Wahi case raises the question of what exactly is insider trading. As I've said before, insider trading involves trading in "securities". Accordingly, in making its case, the SEC alleges that at least nine of the tokens listed on Coinbase and pre-traded by the defendants match the "investment contract" analysis of the Howey test. But do they really?
The SEC claims that some of the tokens are "purported" to be governance tokens, but are "securities". So it's worth noting this warning shot. For token issuers who take solace from lawyers who have ruled their tokens are not securities because they are governance tokens, beware - and perhaps seek another opinion from a qualified securities lawyer.
Besides the interesting aspects of this particular case, what does it mean for others, like Coinbase itself? Well, the SEC claims that certain tokens on its exchange are “securities”. If so, then Coinbase should be registered as a “securities exchange” under the Securities Exchange Act of 1934. Unsurprisingly, within days of filing with the SEC, it was reported that Coinbase was making the under investigation by the SEC.
My view is that SEC Chairman Gary Gensler is using this case as yet another “land grab” to take jurisdiction over digital assets – and crypto in particular – away from Commodity Futures Trading Commission. I have already said it. Indeed, CFTC Commissioner Caroline D. Pham also sees through the SEC's efforts.
The best of blockchain, every TuesdaySubscribe for thoughtful explorations and leisurely reads of the magazine.
By subscribing, you agree to our Terms of Service and Privacy PolicyOn the day the complaint was filed, she
This is the second part of my column on cracking down on insider trading involving crypto. In part one, I discussed the criminal indictment of Nathaniel Chastain, a former product manager at the OpenSea NFT marketplace. I also discussed the SEC's allegations against former Coinbase employee Ishan Wahi, his brother, and his friend, based on the "hijacking" theory of insider trading.
Powers On… is a monthly opinion column by Marc Powers, who has spent much of his 40-year legal career working on complex securities-related cases in the United States after a stint at the second. He is now an Adjunct Professor at Florida International University College of Law, where he teaches Blockchain & the Law.
Since United States v. O'Hagan of the Supreme Court in 1997, the misappropriation theory of liability for insider trading was explicitly recognized. Both before and after that date, the "misappropriation" of trade secrets or confidential information used in stock trading has been an active area of enforcement by the Securities and Exchange Commission and criminal prosecution.
Examples include a former Wall Street Journal writer in United States v. Winans of Hudson News magazine stand employees in Securities Exchange Commission v. Smath; a printer for a company that printed tender offer documents in Chiarella v. United States; and more recently, financial analysts in United States v. Newman and Salman v. United States. On the same date as the SEC filing against Ishan Wahi and his two associates, U.S. Attorney for the Southern District of New York unveiled a parallel indictment that charged those same three defendants with wire fraud and conspiracy to electronic fraud.
Informers who receive material, non-public, or confidential information from an informant violate insider trading rules if they know that the informant breached an obligation they owed to another and received some sort of personal benefit from reporting. The Supreme Court said in the 2016 Salman case that personal benefit need not be financial or pecuniary. The benefit requirement is satisfied by granting the gift of this information to a business relative or close friend.
Frankly, it's high time the SEC and US attorneys' offices focused on the real crimes and fraud. This is precisely what insider trading is: fraud. This is an unfair business advantage for someone who learns confidential information and markets it for economic gain and profit. But this Wahi case raises the question of what exactly is insider trading. As I've said before, insider trading involves trading in "securities". Accordingly, in making its case, the SEC alleges that at least nine of the tokens listed on Coinbase and pre-traded by the defendants match the "investment contract" analysis of the Howey test. But do they really?
The SEC claims that some of the tokens are "purported" to be governance tokens, but are "securities". So it's worth noting this warning shot. For token issuers who take solace from lawyers who have ruled their tokens are not securities because they are governance tokens, beware - and perhaps seek another opinion from a qualified securities lawyer.
Besides the interesting aspects of this particular case, what does it mean for others, like Coinbase itself? Well, the SEC claims that certain tokens on its exchange are “securities”. If so, then Coinbase should be registered as a “securities exchange” under the Securities Exchange Act of 1934. Unsurprisingly, within days of filing with the SEC, it was reported that Coinbase was making the under investigation by the SEC.
My view is that SEC Chairman Gary Gensler is using this case as yet another “land grab” to take jurisdiction over digital assets – and crypto in particular – away from Commodity Futures Trading Commission. I have already said it. Indeed, CFTC Commissioner Caroline D. Pham also sees through the SEC's efforts.
The best of blockchain, every TuesdaySubscribe for thoughtful explorations and leisurely reads of the magazine.
By subscribing, you agree to our Terms of Service and Privacy PolicyOn the day the complaint was filed, she
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