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

(Reuters) – A onetime product manager for digital art marketplace OpenSea got some bad news this week from a Manhattan federal judge, days ahead of trial in a novel insider trading case against him.

A Manhattan federal judge has rebuffed defense arguments from Nathaniel Chastain that the prosecution is doomed because OpenSea’s confidential plans to feature new non-fungible tokens, or NFTs, on its website every few days were not inherently valuable and therefore cannot be the basis of wire fraud charges.

According to Manhattan federal prosecutors, Chastain, a onetime OpenSea product manager, exploited the confidential information he obtained because he was in charge of selecting the NFTs that would be featured on the OpenSea website.

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

His lawyers at Greenberg Traurig, meanwhile, assert that the company placed no value on the secrecy of its plans to feature particular NFTs. Those confidential website 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 punted on the question when he declined to dismiss the case last October. Greenberg Traurig then revived the issue last month in a bid to exclude testimony from a government expert who was slated to opine on the inherent value of OpenSea’s confidential website plans.

Chastain’s lawyers argued that the 2nd U.S. Circuit’s recent decision in United States v. Blaszczak — which was issued after Furman’s dismissal ruling in October — clarified that confidential information, in the context of wire fraud, is not property unless it has some inherent value.

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

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

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

Furman pointed to a different line of cases — beginning with the Supreme Court’s 1987 ruling in a case involving a Wall Street Journal columnist who tipped traders about the content of his upcoming articles — in which prosecutors were not required to prove the inherent value of allegedly misappropriated 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 associate’s misappropriation of confidential client information and on traders’ sale of confidential customer stock orders, despite defense arguments that the information had no inherent value.

The underlying principle of these rulings, Furman said, is that the government must prove only that the allegedly misappropriated information was regarded as confidential by the allegedly victimized business.

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

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

Prosecutors, however, can elicit expert testimony about the rise in prices for NFTs that were featured on the website. Furman said that testimony would help jurors “understand the economic factors at play, including the incentives for Chastain to misappropriate the information at issue and the reasons why OpenSea may have had a business interest in safeguarding the exclusivity of the information.”

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

Chastain counsel David Miller declined to comment. The Manhattan U.S. Attorney’s Office did not respond to a phone message.

Trial is set to start on April 24.

Read more:

U.S. charges OpenSea ex-employee in first NFT insider trading case

Ex-OpenSea employee wants first NFT insider trading case tossed

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