This is the second part of my column about the crackdown on insider trading involving crypto. In the first part, 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 “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.
Examples include a former writer for The Wall Street Journal in United States v. Winans; employees at the magazine stand Hudson News in Securities Exchange Commission v. Smath; a printer at 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, the U.S. attorney for the Southern District of New York unsealed a parallel criminal indictment that charged these same three defendants with wire fraud and wire fraud conspiracy.
Tippees that receive material, nonpublic or confidential information from a tipper violate insider trading rules if they know the tipper breached a duty they owed to another and received some sort of personal benefit from the tip. The Supreme Court said in the 2016 Salman case that the personal benefit need not be financial or pecuniary. The benefit requirement is satisfied by bestowing a gift of this information on a trading relative or a close friend.