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OpenSea ‘insider trading’ lawsuit launched in New York District Court

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On April 24, the court for the Southern District of New York held the first jury hearing in the case against former OpenSea product manager Nathaniel Chastain, who is accused of insider trading with non-fungible tokens (NFTs).

The allegations were filed by the U.S. Attorney’s Office in Manhattan on May 31, 2022. Chastain is charged on two counts – wire fraud and money laundering. On the first count, the former employee of the largest NFT market presumably used his insider knowledge to secretly buy 45 NFTs shortly before listing to resell them at a profit immediately afterwards.

The filing cites several instances of misconduct, such as the case with NFT “The Brawl 2.” In August 2021, via anonymous accounts, Chastain allegedly bought four of them “minutes before” they were featured on OpenSea and sold them within hours with 100% profit.

In October 2022, Chastain’s defenders unsuccessfully filed a motion to remove references to “insider trading” from his charges. Chastain argued that using “insider trading” to describe his alleged actions is “inflammatory” because “insider trading” only applies to securities and not NFTs. Prosecutors responded, noting that the “insider trading” allegation can be used to refer to several types of fraud in which someone not known to the public uses it to trade assets.

Related: SEC reaches ‘agreement in principle’ to resolve Coinbase product manager’s insider trading case

As the term “insider trading” had not previously been used in reference to cryptocurrencies or NFTs prior to Chastain’s charges, the outcome of the trial, which is expected to last several weeks, could have a major influence on the legal classification of NFTs.

In 2022, former United States Securities and Exchange Commission (SEC) lawyer Alma Angotti predicted that the case could see NFTs labeled as securities because they could be considered such under the Howey test. In a recent comment to Reuters, another former SEC employee, Philip Moustakis, expressed a similar concern:

In 2022, former United States Securities and Exchange Commission (SEC) lawyer Alma Angotti predicted that the case could see NFTs labeled as securities because they could be considered such under the Howey test. In a recent comment to Reuters, another former SEC employee, Philip Moustakis, expressed a similar concern:

“If this case persists, there is precedent that the insider trading theory can be applied to any asset class.”

In another major recent court case, crypto exchange Coinbase backed a motion to dismiss the insider trading case against the brother of the platform’s former chief product officer, who allegedly used insider knowledge. insiders to trade cryptocurrencies.

Coinbase argues that the SEC lacked jurisdiction to sue since the tokens in question do not pass the Howey test.

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