Today in a Manhattan federal court, Nate Chastain, the former head of product at the leading NFT marketplace OpenSea, was sentenced. Although the formal judgment and sentence has not yet been released to to the public, several media sources report Chastain was sentenced to serve three months in federal prison following his conviction on fraud and money laundering charges in the first ever criminal prosecution of NFT “insider trading”. Ex-OpenSea Executive Nate Chastain Gets 3 Months in Prison for Insider Trading
According to a DOJ press release, in addition to the three month prison term, Chasten was also sentenced to serve three months of home confinement to be followed by three years of supervised release, a $50,000 fine, and ordered to forfeiture the Ethereum he made trading the featured NFTs. DOJ SDNY Press Release
The government charged that Chastain exploited his inside knowledge to profit over $50,000 from trading an estimated 45 NFTs that he had advanced knowledge would be showcased on OpenSea's homepage. The government charged that Chasten concealed these “insider trades” by use of multiple “anonymous” wallets and accounts on OpenSea.
Statement of Facts
During the peak of the NFT bull market, Chastain served as the head of product at OpenSea. The government charged that over a period of approximately twelve weeks, Chastain illicitly leveraged confidential business data related to forthcoming featured NFTs on OpenSea's website, allowing him to secretly buy these NFTs right before their feature and resell them soon after, often for substantial profit. The DOJ charged that Nate’s scheme brought him a profit of $57,115 from approximately 45 NFT trades.
The theory of the government’s case at trial was that given Nate’s prominent role at OpenSea, he had routine access to sensitive, confidential business data. This confidential data was especially valuable since featured NFTs on OpenSea's platform often witnessed a surge in their price. The government charged that despite OpenSea's clear confidentiality policy, Nate abused his position to exploit this inside information, thereby allegedly breaching OpenSea's trust and the trust of its users and artists.
Procedural History
On May 31, 2022, Chastain was indicted by a grand jury in the Southern District of New York on charges of wire fraud and concealment money laundering. These charges related to his alleged scheme to misuse OpenSea's confidential business information.
The trial began on April 24, 2023, and by May 3, 2023, Chastain he was found guilty on both counts. During the trial, the government brought forth eight witnesses, while Chastain called one expert witness. I was in New York the week of the trial and was able to observe some of the court proceedings.
Evidence Presented:
According to the government’s sentencing memorandum, Chastain initiated a practice in May 2021 to showcase featured NFTs on OpenSea's homepage. They allege the process was secretive; even the artists of the featured NFTs were unaware of their work being highlighted until it went live. Being listed on OpenSea’s homepage, would often drive up the value of the featured NFT artist’s works.
The government argued that Chastain was aware of the confidential nature of the featured NFTs and was bound by a confidentiality agreement with OpenSea. They offered evidence that Nate even had chats with a colleague expressing "FOMO" (Fear of Missing Out) regarding buying the featured works.
The government charged that Chastain's desire overcame his better judgment and he began buying and then reselling those featured NFTs thereby making significant profits. According to the DOJ, his methods grew increasingly sophisticated, employing various anonymous crypto wallets to hide his transactions.
Chastain's alleged insider trading scheme was exposed when a Twitter user traced anonymous wallets back to him and tweeted about it. Chastain initially denied the allegations when confronted by OpenSea's co-founder, but the weight of the evidence forced him to resign from OpenSea the following day.
United States Sentencing Guideline Memorandum and Guideline Calculations:
According to defense counsel’s sentencing memorandum, the Probation Department's Presentence Investigation Report (PSR) yielded a total offense level of 18, suggesting an advisory guideline imprisonment range of 27 to 33 months in prison. According to defense counsel’s sentencing memorandum, the United States Probation Office recommended a “non-guideline sentence.”
Nate’s counsel argued at sentencing that “while the PSR appropriately recommends a non-Guidelines sentence, the PSR’s recommendation of imprisonment for a year and a day fails to adequately reflect the novel nature of the instant prosecution, the pertinent facts underlying the instant case, and Nate’s individual circumstances. The defense argued that Nate should have received a more lenient sentence—either time served or, alternatively, probation combined with community service and/or house arrest.
The government argued in its sentencing memorandum that Nate should receive a sentence a below Guidelines sentence of between 21 and 27 months’ imprisonment noting such a sentence “would be sufficient but not greater than necessary to serve the legitimate ends of sentencing.”
Nate has 14 days to file a Notice of Appeal challenging his conviction of guilt, judgment and sentence.