Decrypt’s Art, Fashion, and Entertainment Hub.
A former employee of NFT marketplace OpenSea failed to convince a judge that charges levied against him should be dismissed, clearing the way for his trial to proceed.
Nate Chastain, former head of product at OpenSea, has been charged with wire fraud and money laundering. The government alleges that Chastain illegally profited off the sale of NFTs in 2021.
Chastain was responsible for deciding which NFTs would be featured on the exchange’s homepage. With this authority and knowledge, the indictment alleges he purchased certain NFTs before they were featured and then flipped them for a profit once their value had increased.
Prosecutors also claimed that Chastain had set up wallet addresses to hold the NFTs and funnel profits back to himself.
OpenSea decided to part ways with Chastain last month after it had been made aware of the investigation. It also sought the help of a third party to “conduct a thorough review of the incident and make recommendations on how we can strengthen our existing controls,” according to a blog post by the company.
Chastain had moved to have the charges dismissed, putting forth a series of arguments that ultimately failed to sway the judge in the case, according to a court document reviewed by Decrypt.
Chastain argued that the information he allegedly misappropriated is “not ‘property’ within the meaning of the statute,” and that the wire fraud charges should be dismissed. He also argued that he did not commit wire fraud because doing so necessitates “the existence of trading in securities or commodities,” which currently does not include NFTs.
In regards to money laundering, he claimed that the government “seeks impermissibly to criminalize the mere movement of money” and did not sufficiently prove the concealment and financial transaction elements of money laundering charges.
In denying the motion for dismissal, the judge referenced a court case where a reporter from the Wall Street Journal entered into a scheme with traders, tipping them off on the contents and timing of articles before they were published and sharing in the resulting profits.
“The columnist and traders were charged with, and convicted of, both securities fraud and mail and wire fraud,” the document stated. “So, not ‘insider training’ as conventionally understood, but definitely ‘wire fraud,’” read the response.
The judge did concede that the use of the term “insider trading” may be misleading and said the appropriate response would be to strike the phrase from the indictment and prevent the government from using the term at trial.