August 23, 2022:
Nate Chastain’s lawyers have filed a motion to dismiss the government’s indictment charging him with wire fraud and money laundering in connection with the OpenSea “insider trading” case. Nate’s lawyers raise two very novel theories. Here’s a thread breaking it down. Twitter Thread
First, let’s set the ground rules. Fed. R. Crim. Pro. 12(b) permits the defense to seek dismissal before trial of any charges brought by the government on the theory that even if all facts alleged in the indictment are “true”, those facts are insufficient to prove the elements of the crime charged.
Nate’s lawyers argue that in bringing this “first-of-its-kind prosecution”, the government
“posit[s] broad assertions of insider trading, property theft, and money laundering” legal theories that “are contrary to years of settled precedent and are a transparent effort to plant a flag in the blockchain industry.”
Before I do a deep dive, here’s the TLDR. The defense theory of dismissal is basically three-fold: (1) NFTs are not securities or commodities subject to an “insider trading” wire fraud prosecution; (2) Nate’s decision-process in selecting which specific NFTs to list on OS’s home page, and then trading on those NFTs, is not insider trading because he did not misappropriate any of OS’s business information that in-turn impacted financial markets; and (3) he cannot be prosecuted for money laundering because he did not engage in the predicate crime of wire fraud and he did nothing to conceal the proceeds of his alleged “crime” by moving ETH on an open and transparent blockchain.
They argue that the government has charged Nate under a wire fraud theory that is linked to “insider trading.” But, by doing so the “government not only ignores well-established precepts of the wire fraud statute, but also turns a blind eye to decades of jurisprudence outlining the boundaries of the misappropriation theory of insider trading.”
The government charges Nick with committing “insider trading” by allegedly misappropriating OpenSea’s confidential “business information” for his own financial gain and then laundering the proceeds of that alleged wire fraud crime.
So what does the government claim to be the “confidential business information” that Nate misappropriated? Nate had “advance knowledge of which NFTs would be featured on OpenSea’s homepage” and he allegedly used that information to purchase certain NFTs after they were featured on OS’s page and then sold those NFTs for a profit.
Nate’s lawyers maintain that the government’s insider trading wire fraud case presents an issue of first impression because “NFT’s are neither securities nor commodities and the government agreed with this position at the pretrial hearing. The defense argues that under well-settled Supreme Court decision in Carpenter v. United States, 484 U.S. 19 (1987), one cannot be prosecuted for wire fraud/insider trading unless the underlying thing traded is a security or commodity that impacts financial markets.
The defense argues that under the Carpenter case, in order to be prosecuted for wire fraud under the insider trading misappropriation theory, a defendant must not only have breached a duty owed to the source of the information, but breach must have impact financial markets.
The defense asks how can the government prove a wire fraud case of insider trading, when the thing being traded is neither a security nor a commodity and the information leaked did not impact financial markets?
Nate’s team also argues that the insider trading wire fraud count should be dismissed because the government’s case rests on the flawed position “that an employer has a property interest in information that has no inherent economic or market value”—namely that Nate’s unspoken thoughts or ideas about which NFTs should be featured on the OS cover page is not property that OS owns.
The defense team argues that “a marketing concept, such as what should essentially be featured in an art gallery window, which has no determinable economic or saleable value and is based on an employee’s unspoken thoughts-regarding the mere selection of an item for prominent display—does not fit this bill.”
Nate also moves to dismiss the government’s money laundering count because he argues he did nothing to conceal the proceeds of his NFT sales since the blockchain is a fully transparent ledger. His defense team argues that the government is trying to advance a “novel theory of money laundering, despite the fact that it cannot demonstrate any effort to conceal the unlawful proceeds of a specified unlawful activity, as every single cryptocurrency transaction at issue was conducted on the Ethereum blockchain, and thus, completely visible to the public.
Alternatively, Nate’s legal team asks that if the Court is inclined to deny the motion to dismiss, then the they should be entitled access to the government’s instructions to the grand jury on the charges.
Under the federal rules of criminal procedure, grand jury proceedings generally must remain secret unless the defense can make “a particularized” showing of a need for disclosure of any part of those proceedings. Nate’s team argues that because this case involves “issues of first impression, … the government’s instructions to the grand jury should be disclosed.”
If the Court denies the motion to dismiss, but grants the defense access to the Grand Jury instructions, then the defense will have greater insight into the government’s theory of the case and how they persuaded the Grand Jury to return an indictment against Nate.
The next step will be for DOJ prosecutors to file a memorandum in response to the defense motion to dismiss. The Court will then either rule on the motion and response or, more likely, set the case for a hearing and hear arguments from the lawyers. Stay tuned for more on this.