Back in November of 2021, law enforcement agents seized 50,491.06251844 Bitcoin from James Zhong's house, along with other assets including cash, physical Bitcoin, and precious metals. The total value of all Bitcoin seized is approximately $3.4 billion. Additionally, Zhong voluntarily surrendered 1,004.14621836 additional Bitcoin in or around March 2022.

On April 14, 2023, Zhong appeared in federal court in the Southern District of New York and was sentenced to one year and one day in prison for committing wire fraud. The government charged that back in September 2012, Zhong unlawfully obtained approximately 50,000 Bitcoin from the Silk Road dark web internet marketplace. Crypto Criminal Defense Lawyer 

In May of 2022, Former OpenSea employee, Nathaniel Chastain, was indicted on one count of wire fraud, in violation of 18 U.S.C. § 1349, and one count of concealment money laundering, in violation of 18 U.S.C. § 1956(a)(1)(B)(i). The government essentially accuses Chastain of using his insider knowledge to profit from NFTs featured on OpenSea's homepage. Chastain was responsible for selecting NFTs that would be featured on OpenSea’s homepage. The government alleges Chastain abused his position by buying featured NFTs and then selling it at a profit using anonymous accounts. Crypto Criminal Defense Lawyer Blog

In February 2023, the government filed notice of intent to call expert witnesses at trial. According to the Government Expert Notice, in intends to call Professor Daniel Taylor to present a three-part opinion. First, he will explain to the jury that information about upcoming featured NFTs was economically valuable as it represented expected future demand. Second, he will offer his opinion that the value of this information did not diminish simply because OpenSea did not sell or trade on it. Professor Taylor would also offer the jury examples of companies that maintain the confidentiality of information to serve valuable business purposes, especially in the context of running marketplaces. Lastly, Professor Taylor would discuss the importance of trust in functioning marketplaces and how perceptions of unfair advantages can lead to users leaving the market. He will argue that this concept is relevant to OpenSea's online marketplace and that the company's reaction to the accused's misconduct supports this view. The government maintains: 

Professor Taylor’s opinion is narrow. He will not opine that information about upcoming featured NFTs was “confidential business information” or try to offer a definition of that term.1 He also will not opine on whether or not OpenSea ultimately lost users or traffic, or suffered some long-lasting erosion of trust, from Chastain’s misconduct. To the extent he addresses any events after Chastain’s trading was revealed, it is solely to corroborate his view that the concept of “trust” in the academic literature about markets applies in the context of OpenSea’s business. Government Motion 

On March 24, 2023, Chastain’s defense team filed its initial expert notice stating they intend to call Dr. Matthew Edman and Professor Douglas Skinner. Dr. Edman runs a private cybersecurity firm specializing in cryptocurrency and digital forensics, and Professor Skinner is a Professor of Accounting at the University of Chicago. Defense counsel plat to call Dr. Edman to testify that Chastain did not try to hide his actions by using VPNs or cryptocurrency scrambling tools. The defense plans to call Professor Skinner to discuss the meaning of "confidential business information" and introduce economic concepts like "fundamental information" and "informed trading."

The government has filed motions to exclude both defense experts arguing that arguing that: 

Testimony from both experts should be precluded in its entirety, or at a minimum, strictly curtailed. Dr. Edman’s testimony is, fundamentally, an effort to have an expert tell the jury that Chastain did not try to hide his activities. That is not a proper subject of expert testimony: no expert can get inside the defendant’s head, and it is the jury’s job to assess Chastain’s intent. Professor Skinner, for his part, also goes well outside the bounds of appropriate expert testimony. His proposed testimony about confidential business information directly intrudes on the role of the court to explain the law and the jury to apply the law to the facts, and his testimony about other economic concepts will serve only to distract the jury from the relevant factual issues in the case. 

According to the Edman Notice, Dr. Edman intends to opine on what Chastain intended, or did not intend, when he took certain actions to engage in insider trading. Dr. Edman plans to claim that Chastain “did not attempt to obfuscate his identity or conceal his OpenSea activity by using a VPN or other anonymizing technology,” and that Chastain “did not attempt to obfuscate his OpenSea activity by laundering cryptocurrency funds through the use of mixers, non-KYC exchanges, or other techniques often associated with illicit activity.” Ex. D, at 2-4. In offering these opinions, Dr. Edman also intends to testify about what, in his view “individuals engaging in illicit activity will attempt” to do to cover their tracks. Id. Separately, Dr. Edman also plans to opine that it is “common for sophisticated cryptocurrency users to use multiple wallets and wallet addresses to store and transact with their cryptocurrency,” and to analyze how the Defendant used different wallets and wallet addresses in connection with his activity on OpenSea. Id. 

Dr. Edman plans to opine that various actions Chastain took, and did not take, establish that Chastain was not attempting to obfuscate his identity or conceal his OpenSea activity. (Ex. D at 2-4). This testimony, which is tantamount to opinion testimony about Chastain’s intentions and mental state, is entirely improper and must be precluded. Similarly, Dr. Edman’s opinions that certain behaviors are “common” for “sophisticated cryptocurrency users” and thus not indicative of intent to conceal one’s online activity, is not scientifically based and is unhelpful to the finder of fact, as it risks significant confusion of the issues. Dr. Edman’s testimony should be excluded, or in the alternative, severely curtailed to avoid confusion of the issues and misleading the jury.

Professor Skinner proposes to address a grab-bag of economic concepts, with little regard for whether some opinions intrude on the role of the court and the jury, and whether other opinions bear any reasonable relationship to the facts at hand. Viewed as a whole, his testimony is certain to drag the jury through confusing, and irrelevant, economic jargon that will muddy the straightforward legal and factual issues in the case. This Court should exclude that testimony in its entirety, or at a minimum strictly cabin it. 

Government Opposition Motion

Defense counsel filed a motion in opposition arguing that: 

The government has repeatedly emphasized in writing that it does not have to prove that information concerning soon-to-be-featured NFTs had inherent value to OpenSea. The government is wrong. And its legal position stands in stark contrast to relevant Supreme Court and Second Circuit precedent holding to the contrary. As made clear throughout its motion to exclude the testimony of Professor Skinner and Dr. Edman, however, the government cares less about proving the elements of the wire fraud statute, and more about enforcing its own view of integrity. To this end, the government’s arguments in support of exclusion are not only meritless, but frequently confusing and contradictory. Defense Response 

The case is currently scheduled for a pretrial conference on April 20, 2023. Stay tuned for more on this upcoming trial. 

This blog post was prepared with the assistance of ChatGPT-4 AI. Nothing in this post should be considered legal advice or the creation of an attorney-client relationship. This blog is strictly for informational purposes only.

The Department of Justice (DOJ) recently announced the seizure of virtual currency valued at approximately $112 million, linked to a number of cryptocurrency investment scams. DOJ Press Release

According to the DOJ press release, the seized virtual currency accounts were allegedly used to launder proceeds from various cryptocurrency confidence scams. In these schemes, fraudsters cultivated long-term relationships with their victims, usually through online platforms, and enticed them to invest in fraudulent cryptocurrency trading platforms. The victims' funds were then funneled to cryptocurrency addresses and accounts controlled by the scammers and their co-conspirators. Crypto Criminal Defense Lawyer Blog 

According to a DOJ Press Release, Rashawn Russell former investment banker from Brooklyn, has been arrested on charges related to operating a cryptocurrency investment fraud scheme. Russell allegedly defrauded investors by making false promises of high returns from their investments in cryptocurrencies, misappropriating funds for personal use, gambling, and repaying other investors. Crypto Criminal Defense Lawyer Blog 

The indictment also states that Russell failed to repay investors' principal investments or provide the promised returns, and falsely claimed to have wired money to investors who requested repayment. DOJ Press Release 

Russell was scheduled to appear in Brooklyn federal court on April 11 for arraignment on an indictment charging him with perpetrating a cryptocurrency investment fraud scheme. 

On April 9, 2023, John J. Ray III filed the First Interim Report in the FTX bankruptcy case. Interim Report

This first interim report provides a high-level overview of certain of the FTX Group’s control failures in the areas of (i) management and governance, (ii) finance and accounting, and (iii) digital asset management, information security and cybersecurity. The report does not address all control failures in these or other areas. The Debtors continue to learn new information daily as their work progresses and expect to report additional findings in due course. Interim Report

The report starts off by summarizing the “five core objectives” the Debtors hoped to accomplish with in the FTX Chapter 11 bankruptcy filing. Those objections included: (1) implementation of controls, (2) asset protection and recovery, (3) transparency and investigation, (4) efficiency and coordination, and (5) maximization of value. Crypto Criminal Defense Lawyer Blog 

The report emphasizes the alleged lack of records and evidence within the FTX Group, noting “extensive commingling of assets” that made it challenging for the group to identify and protect those assets. The report also recounts a “massive cyberattack”, resulting in a $432 million loss which only added to the complexity of the Debtor’s work.

The report further highlights that: 

Despite the public image it sought to create of a responsible business, the FTX Group was tightly controlled by a small group of individuals who showed little interest in instituting an appropriate oversight or control framework. These individuals stifled dissent, commingled and misused corporate and customer funds, lied to third parties about their business, joked internally about their tendency to lose track of millions of dollars in assets, and thereby caused the FTX Group to collapse as swiftly as it had grown. In this regard, while the FTX Group’s failure is novel in the unprecedented scale of harm it caused in a nascent industry, many of its root causes are familiar: hubris, incompetence, and greed. Interim Report

The Report identified several “control failures” including:

  1. Management and governance: The Report noted that the FTX Group allegedly lacked appropriate management, governance, and organizational structure—finding that a handful of employees had virtually limitless power with no effective oversight or controls.

  2. Finance and accounting: Despite handling billions of dollars in assets and millions of transactions per day, the FTX Group allegedly lacked fundamental financial and accounting controls, complicating the reconstruction of their balance sheets.

  3. Digital asset management, information security, and cybersecurity: The report observed that FTX Group's alleged control deficiencies exposed their crypto assets to grave risks, including the November 2022 Breach.

Among many examples of its control deficiencies in this area, the FTX Group did not have any mechanism to identify promptly if someone accessed the private keys of central exchange wallets holding hundreds of millions or billions of dollars in crypto assets, and it did not fully enable even the basic features offered by AWS to assist with cyber threat detection and response.“root” login to its AWS account, the cloud computing environment where it operated the FTX exchanges and stored keys to billions of dollars in crypto assets, even though such access would provide virtually complete access to the environment. Interim Report

The Report further noted that the Debtors have recovered and secured over $1.4 billion in digital assets and identified an additional $1.7 billion in the process of being recovered. The Report concluded by noting that this is an ongoing investigation and that continued recovery efforts they will continue to provide further updates on the proceedings.

This blog post was prepared with the assistance of ChatGPT-4 AI. Nothing in this post should be considered legal advice or the creation of an attorney-client relationship. This blog is strictly for informational purposes only.