It’s been over two years since we last discussed a fraud case the government described as its “first crypto insider trading case.” The case involved the employee of OpenSea, the largest online market for NFTs, who was responsible for selecting NFTs to be featured on OpenSea’s homepage, allegedly purchasing those NFTs in advance and selling shortly after they were featured, at a substantial gain. The defendant was convicted of wire fraud and money laundering charges — which the U.S. Attorney’s Office opted to bring rather than securities or commodities fraud charges — after a jury trial.

The Second Circuit has just vacated those convictions, finding that two jury instructions — “that property protected by the wire fraud statute need not have commercial value, and the defendant could be convicted of wire fraud by failing to abide by societal mores” — were prejudicial error that warranted a new trial. This Sheppard Mullin blog explains the Second Circuit’s issues with the jury instructions as follows:

The Court held that property must be shown to have commercial value to satisfy the federal wire fraud statute . . . OpenSea did not charge for its NFT feature information and evidence submitted by the government suggested that the information was merely tangential to OpenSea’s business. Since the jury could have ignored such evidence under the district court’s erroneous instruction, the Second Circuit held that Chastain was prejudiced by the instruction and entitled to a new trial.

The Court also considered if the instruction that the jury could convict if Chastain “conducted himself in a manner that departed from traditional notions of fundamental honesty and fair play in the general and business life of society” was prejudicial error. In concluding that it was, the court held that the legal standard was incorrect and allowed the jury to improperly convict based on the government’s “view of integrity” in business conduct rather than the misappropriation of “property rights only.” It added that under such a standard, “‘almost any deceptive act could be criminal.’”

The blog says that Chastain follows SCOTUS’s lead in Kelly v. United States, 590 U.S. 391 (2020) and Ciminelli v. United States, 598 U.S. 306, 314 (2023), imposing limitations on prosecutors’ use of the federal wire fraud statute, and has important implications for the crypto industry.

Some experts hypothesized that prosecutors would turn to the federal wire fraud statute to crack down on insider trading in the space since United States Department of Justice policy now directs prosecutors not to pursue securities or commodities fraud charges that would require litigating whether the digital asset is a security or a commodity and the Securities and Exchange Commission embarks on its ambitious “Project Crypto” to develop a new regulatory framework. Chastain serves as another check on prosecutorial creativity when using the federal wire fraud statute to police crypto.

– Meredith Ervine