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“Insider Trading” or “Wire Fraud”: A Closer Look at the Charges Facing a Former OpenSea Employee and What We Can Learn From It

As the DOJ, SEC, and other regulators continue to ramp up their crypto enforcement teams, the US Attorney’s Office in the Southern District of New York stepped into the spotlight this week with an indictment alleging “insider trading” in the NFT market by an OpenSea employee. However a closer look at both the indictment and the statements of the US Attorney for the Southern District reveals that "NFTs might be new, but this type of criminal scheme is not."  

The indictment alleges that the defendant who was in charge of selecting what NFTs would appear on OpenSea’s homepage bought about 45 NFTs before they were featured on the homepage. He then sold them for “between two and five times the purchase price” shortly after they appeared, profiting from the increase in value that typically followed when an NFT was featured on the homepage.  Put another way he was allegedly front-running his employer’s market-moving promotions. 

While this is an interesting case, it is unlikely to address the more substantial issues in the cryptocurrency/NFT regulatory space such as clarifying how a 1946 US Supreme Court case defining “a security” will be applied to a concept and technology that no one could have contemplated when it was written. This case will not be the one that provides clarity regarding that issue.

This case also demonstrates that what happens on the blockchain doesn’t necessarily stay on the blockchain. It has been reported that members of the NFT community may have tipped off the government and OpenSea about the potential wrongdoing after observing that the defendant was using “secret” wallets to purchase the NFTs prior to their release on the OpenSea front page. These sophisticated crypto “do-gooders” analyzed the defendant’s wallet activity and posted tweets revealing the suspected scheme.  If this is accurate, it is a powerful example of self-monitoring and policing within the crypto community.  As we see more market dips – and potentially more money lost – we may see further policing and intelligence being publicized and ultimately shared with regulators and investigators.  This is yet another reminder that the blockchain is truly open source with transactions that are available for all to see. Time will tell if posts by sophisticated self-policing “Blockchain Detectives” become a referral source for law enforcement.

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Authors

Cory S. Flashner is a Mintz Member and former federal and state prosecutor whose white collar defense practice includes advising clients on securities and anti-money laundering laws and regulations.

Edmund P. Daley

Associate

Edmund P. Daley is an associate in the firm’s Litigation section, focusing on white collar defense and financial services litigation. He represents public and private companies, investors and individuals in all manner of government investigations, enforcement actions and compliance related to financial laws. He is an active member of the firm’s Appellate Practice Group and has experience preparing motions for state and federal court cases, legal opinions and appellate briefs.