Powers On… Insider trading with crypto is targeted — Finally! Part 2 – Cointelegraph Magazine

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This is the second part of my column on the crackdown on insider trading with 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 charges 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 by Marc Powers, who spent much of his 40-year legal career working on complex securities-related cases in the United States after a stint at the SEC. He is now an associate 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 impeachment theory of insider trading liability was expressly 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 Hudson News magazine bar in Securities Exchange Commission v. Smath; printer at a company that printed tender documents in Chiarella v. the 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 US attorney for the Southern District of New York unsealed a parallel criminal indictment charging the same three defendants with wire fraud and wire fraud conspiracy.

Tippees who receive material, nonpublic or confidential information from a tipper are in violation of insider trading rules if they know the tipper has breached a duty they owed to another and received some personal benefit from the tip. The Supreme Court said in the 2016 Salman case that the personal benefit does not have to be financial or monetary. The benefit requirement is satisfied by making a gift of this information to a business relative or close friend.

Frankly, it’s about time the SEC and US attorney’s offices focused on real crimes and fraud. This is exactly what insider trading is: a scam. It is an unfair business advantage of someone who learns confidential information and trades on it for economic gain and profits. But this Wow case begs the question of what exactly is insider trading. As I said before, insider trading involves trading in “securities”. Therefore, to bring its case, the SEC claims that at least nine of the tokens listed on Coinbase and traded in advance by the defendants fit the “investment contract” analysis of the Howey test. But do they really?

The SEC says that some of the tokens are “expected” as governance tokens but are “securities”. So, it’s worth noting this warning shot. For those token issuers comforting lawyers who have decreed their tokens non-securities because they are governance tokens, take heed — and perhaps get another opinion from a qualified securities attorney.

Aside from the interesting aspects of this particular case, what does it mean for others, like Coinbase itself? Well, the SEC claims that some tokens on their exchange are “securities”. If that is so, then Coinbase should be registered as a “securities exchange” under the Securities Exchange Act of 1934. Not surprisingly, a few days after the SEC filing, it was reported that Coinbase was under SEC investigation.

My view is that SEC Chairman Gary Gensler is using this case as a further “land grab” to take jurisdiction over digital assets – and crypto specifically – away from the Futures Trading Commission. I’ve said this before. Indeed, CFTC Commissioner Caroline D. Pham also oversees the SEC’s efforts.

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On the day of the complaint, she published public statement, saying: “The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together. Important questions are best addressed through a transparent process that engages the public to develop appropriate policy.” […] Regulatory clarity comes from being out, not in the dark.”

Pham also said: “SEC vs. Wahi is a striking example of “regulation by coercion.” Four days later, on July 25, CFTC Chairman Rostin Behnam spoke at the Brookings Institute and reiterated the view that the CFTC would be the natural and best regulator to have oversight of crypto.

What about those nine “issuers” of the nine tokens that the SEC claims are securities? Well, they too can expect to be subject to independent investigations by SEC personnel looking into registration violations. Any of their ICOs or offerings are within the five-year statute of limitations for the SEC to take enforcement actions against them. Stay tuned.


The opinions expressed are solely those of the author and do not necessarily reflect the opinions of Cointelegraph or Florida International University College of Law or its affiliates. This article is for general information and is not intended to be and should not be taken as legal or investment advice.


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