The United States Attorney for the Southern District of New York and the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced today the unsealing of an Indictment charging Nathaniel Chastain with wire fraud and money laundering in connection with a scheme to commit insider trading in Non-Fungible Tokens, or “NFTs,” by using confidential information about what NFTs were going to be featured on [the marketplace] homepage for his personal financial gain. Chastain was arrested this morning in New York.
U.S. Attorney Damian Williams said: “NFTs might be new, but this type of criminal scheme is not. As alleged, Nathaniel Chastain betrayed his employer by using its confidential business information to make money for himself. Today’s charges demonstrate the commitment of this Office to stamping out insider trading – whether it occurs on the stock market or the blockchain.”
FBI Assistant Director-in-Charge Michael J. Driscoll said: “In this case, as alleged, Chastain launched an age-old scheme to commit insider trading by using his knowledge of confidential information to purchase dozens of NFTs in advance of them being featured on [the marketplace] homepage. With the emergence of any new investment tool, such as blockchain-supported non-fungible tokens, there are those who will exploit vulnerabilities for their own gain. The FBI will continue to aggressively pursue actors who choose to manipulate the market in this way.”
As alleged in the Indictment:
In violation of the duties of trust and confidence he owed to his employer, Chastain exploited his advanced knowledge of what NFTs would be featured on the marketplace’s homepage for his personal financial gain
As part of his employment, Chastain was responsible for selecting NFTs to be featured on the homepage and the company kept confidential the identity of featured NFTs until they appeared on its homepage. After an NFT was featured on the homepage, the price buyers were willing to pay for that NFT, and for other NFTs made by the same NFT creator, typically increased substantially
From about June 2021 to at least in or about September 2021, Chastain used this confidential business information about what NFTs were going to be featured on its homepage to secretly purchase dozens of NFTs shortly before they were featured. After those NFTs were featured, Chastain sold them at profits of two to five times his initial purchase price. To conceal the fraud, Chastain conducted these purchases and sales using anonymous digital currency wallets and anonymous accounts
Chastain is charged with one count of wire fraud and one count of money laundering, each of which carries a maximum sentence of 20 years in prison. As always, the charges contained in the Indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty. It is interesting to note that there is no allegation that this is insider trading under securities law. As part of our thought leadership in this space, our blockchain team seeks to proactively advise clients on various blockchain and NFT-related issues before they make news. For some time, we have advised companies that deal in NFTs (e.g., marketplaces and issuers) to consider developing an NFT insider trading policy. As this indictment shows, liability for improper trading can arise even if the NFT is not a security. These policies cover the types of activities addressed here and others such as “wash trades” and other improper trading designed to manipulate the price or trading volume of NFTs. We have been working with a number of companies who recognized the benefits of adopting such a policy to supplement their existing policies. We would expect that in light of this indictment, more companies will do the same. Now is a good time to adopt a policy if you do not yet have one.