In the NFT case on insider trading, the judge says that secret website plans can be the basis for fraud

(Reuters) – A one-time chief product officer for digital art marketplace OpenSea got bad news this week from a federal judge in Manhattan, days before his trial in a new insider trading case against him.

A federal judge in Manhattan has rejected defense arguments by Nathaniel Chastain that prosecutors were convicted because OpenSea’s confidential plans to have new non-fungible tokens, or NFTs, on its website every few days were not intrinsically valuable and therefore cannot be the basis for wire fraud. costs.

According to federal prosecutors in Manhattan, Chastain, a one-time OpenSea product manager, exploited the confidential information he obtained because he was responsible for selecting the NFTs to be displayed on the OpenSea website.

Prosecutors allege he allegedly bought dozens of digital art tokens before they received their stars on the site, then sold the NFTs at a profit when the price rose in response to the online exposure. Chastain was indicted for wire fraud based on the government’s allegation that he misused OpenSea’s property when he bought and sold NFTs based on confidential information about tokens that would be featured on the website.

His lawyers at Greenberg Traurig, meanwhile, argue that the company placed no value on the secrecy of its plans to hold special NFTs. Those confidential site plans, Chastain’s lawyers argue, cannot be considered company property if they have no value to the company.

Greenberg Traurig first asserted the property argument in a motion to dismiss the indictment. U.S. District Judge Jesse Furman asked the question when he refused to dismiss the case last October. Greenberg Traurig then revived the issue last month in an effort to exclude testimony from a government expert who was supposed to opine on the intrinsic value of OpenSea’s confidential site plans.

Chastain’s attorneys argued that the 2nd US Circuit’s recent decision in United States v. Blaszczak — which followed Furman’s October dismissal decision — clarified that confidential information, in the context of wire fraud, is not property unless it has intrinsic value.

The Blaszczak case, which has followed a long and winding path, involves allegations of insider trading based on a US government’s confidential regulatory plans to set reimbursement rates for certain medical products and services. The 2nd Circuit’s December opinion (among many other things) confirmed that under a 2020 US Supreme Court precedent, the federal agency did not have a proprietary interest in its yet-to-be-disclosed regulations.

The lesson from Blaszczak, argued Greenberg Traurig, is that “the wire fraud statute requires that deprivation of money or property be an object of the fraud.” OpenSea executives, Greenberg said, told government investigators that the site places no value on which NFTs will be featured. So according to Chastain’s counsel, the government cannot rely on an expert to tell jurors otherwise.

But in a ruling on Monday, Furman agreed with arguments by the Manhattan US Attorney’s Office that the Blaszczak case is distinguishable because it involved undisclosed regulatory information — not confidential business information.

Furman pointed to another series of cases — beginning with the Supreme Court’s 1987 ruling in a case involving a Wall Street Journal columnist who tipped off traders about the content of his forthcoming articles — in which prosecutors were not required to prove the intrinsic value of allegedly embezzled business property . Case law in the 2nd Circuit, as the government and Furman explained, has allowed prosecutors to bring cases based on a law firm’s employees’ misuse of confidential client information and on traders’ sales of confidential customer stock orders, despite defense arguments that the information had no intrinsic value.

The underlying principle of these rulings, Furman said, is that the government only has to prove that the allegedly misappropriated information was viewed as confidential by the allegedly exposed business.

However, the judge also said that the jurors who ultimately decide whether the defendants committed wire fraud may want to know whether the business placed any value on the allegedly misused information. The business’ assessment, he said, could be relevant to the jury’s determination of whether the information was in fact proprietary under the wire-fraud statute.

In the NFT case, Furman said, the government’s expert witness may not give the jury his opinion on the intrinsic value of information about which NFTs will be featured on the OpenSea website and may not tell jurors how he defines the phrase “confidential business information .”

However, the prosecution may provide expert testimony about the price increase for NFTs that was featured on the website. Furman said testimony would help jurors “understand the economic factors at play, including the incentives for Chastain to misuse the information at issue and the reasons why OpenSea may have had a business interest in ensuring the exclusivity of the information.”

The judge also said Chastain can call an expert witness to rebut the government’s expert, but his expert would similarly be precluded from offering an opinion on the definition of confidential business information.

Chastain attorney David Miller declined to comment. The Manhattan US Attorney’s Office did not return a phone message.

The trial is set to start on April 24.

Read more:

US charges OpenSea former employee in first NFT insider trading case

Ex-OpenSea employee wants first NFT insider trading case thrown out

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