This is the second section of my column on the crackdown against insider trading in crypto. I covered the criminal indictment against Nathaniel Chastain (a former product manager at OpenSea NFT market). I also spoke about the allegations made by the SEC against Ishan Wahi (his brother) and his friend regarding Coinbase employees, which were based on the “misappropriation” theory of insider trading.
Powers On…
is a monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an adjunct professor at Florida International University College of Law, where he teaches “Blockchain & the Law.”
Since the
United States v. O’Hagan
Supreme Court case in 1997, the misappropriation theory of insider trading liability has been explicitly recognized. Both before that date and after, “misappropriation” of company secrets or confidential information used in connection with stock trading has been an active area of Securities and Exchange Commission enforcement and criminal prosecutions.
One example is a former writer at The Wall Street Journal in United States. Winans. Employees at Hudson News in Securities Exchange Commission. Smath. A printer at a company that printed tender offers in Chiarella. United States. More recently, financial analysts in United States. Newman. Salman. The SEC filed against Ishan Wahi along with his associates on the same day that the U.S. Attorney for the Southern District of New York unveiled a parallel criminal case in which the three same defendants were charged with wire fraud conspiracy and wire fraud conspiracy.
Insider trading rules prohibit tippers from giving tippers material, confidential or nonpublic information. Tippees who receive tippers’ tipping information may be found to have violated a duty they owe another. If tippers are aware of their breached duties and received some kind of personal benefit from the tipping, they can also be charged with insider trading. In the 2016 Salman case, the Supreme Court ruled that personal benefit does not have to be either financial or pecuniary. This information can be given to a trading relative or close friend as a gift.
It’s time for the SEC and U.S. attorneys to focus on fraud and real crimes. Insider trading is fraud. Insider trading is a way to gain unfair advantage over others by learning confidential information and trading on it for financial gains and profits. The Wahi case raises the question: What exactly is insider trading? Insider trading is trading in “securities” as I have stated. Accordingly, the SEC alleges that at least nine tokens listed on Coinbase were traded in advance by defendants. This fits within the Howey test’s “investment contract analysis”. But are they really?
According to the SEC, some tokens may be “purported” governance tokens, but they are actually securities. Don’t take any comfort from token issuers who believe their tokens are securities because they are governance tokens. Get another opinion from qualified securities lawyers.
What does this mean for Coinbase and others? The SEC claims that some tokens on Coinbase’s exchange are securities. If this is true, Coinbase should be registered under the Securities Exchange Act of 1934. Coinbase was under investigation by the SEC just a few days following the SEC filing.
My opinion is that Gary Gensler, Chairman of the SEC, is using this case to further “land grab” jurisdiction over digital assets and crypto from the Commodity Futures Trading Commission. This is something I’ve said before. Caroline D. Pham, CFTC Commissioner, sees through the efforts of the SEC.
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She made a public statement on the day of the filing of the complaint, saying that the SEC’s allegations could have wide-reaching implications beyond the case in question. This underscores how crucial and urgent it is for regulators to work together. Transparency and participation of the public are key to addressing major questions. […] Clear regulatory clarity comes from being open and transparent, not hidden .” span>
Pham said that SEC v. Wahi was a striking example’regulation and enforcement’.
What about the nine “issuers,” nine of the nine tokens that the SEC claims to be securities? They can also expect to be subjected to independent investigations by SEC staff into registration violations. They are all within the five year statute of limitations that allows the SEC to take enforcement action against them. Keep watching.
The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph nor Florida International University College of Law or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.
