June 1, 2022:

The US Attorney for the S.D. of N.Y. returned an indictment against the former head of product at OpenSea alleging he committed wire fraud and money laundering in connection with "insider trading" of NFTs. Let's breakdown the charges. DOJ Link

As part of his employment, Defendant was responsible for selecting NFTs to be featured on OpenSea’s homepage. OpenSea kept confidential the identity of featured NFTs until they appeared on its homepage. 

After an NFT was featured on OpenSea’s 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 at least in or about June 2021 to at least in or about September 2021, [Defendant] used OpenSea’s 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 on OpenSea, [Defendant] sold them at profits of two-to-five-times his initial purchase price." Complaint: https://www.justice.gov/usao-sdny/press-release/file/1509701/download "To conceal the fraud, [Defendant] conducted these purchases and sales using anonymous digital currency wallets and anonymous accounts on OpenSea." According to the indictment, Defendant "was responsible for selecting the NFTs that would be featured on OpenSea's homepage. Because of his role at OpenSea, [Defendant] knew what NFTs were going to be featured before members of the public." According to the Government, Defendant "also knew that the value of an NFT typically rose after it became a featured NFT, as did other NFTs made by the same NFT creator."

Here's a critical fact about this case: "At all times relevant to this indictment, employees of OpenSea, including [Defendant] ... had an obligation to maintain the confidentiality of confidential business information received in connection with their work for OpenSea and an obligation to refrain from using such information except for the benefit of OpenSea or to the extent necessary to perform work for OpenSea." "Confidential information included any information not generally known or available outside of OpenSea. Indeed, upon joining OpenSea, [Defendant] signed a written agreement in which he acknowledged these obligations."

The DOJ alleges that: "To conceal his purchases of featured NFTs before they appear on OpenSea's homepage, [Defendant] used anonymous OpenSea accounts, instead of his publicly-known account in his own name, to make the purchase and sales." "Over the course of his scheme to profit by misappropriating OpenSea's confidential business information about the featured NFTs, [Defendant] purchased ... approximately 45 NFTs 

on approximately eleven separate occasions. [Defendant] typically sold those NFTs for between two and five ties his purchase price."

Count 1 charges Wire Fraud in violation of 18 U.S.C. § 1343. The elements of wire fraud: (1) that the defendant voluntarily and intentionally devised or participated in a scheme to defraud another out of money; (2) that the defendant did so with the intent to defraud (3) that it was reasonably foreseeable that interstate wire communications would be used; and (4) that interstate wire communications were in fact used).

The Government alleges Defendant misappropriated "OpenSea's confidential business information by purchasing NFTs that he knew were going to be featured on OpenSea's homepage, and then profited by reselling the NFTs after they had been ... appreciated in value." Count 2 charges Money Laundering: intent to conduct or attempt to conduct a financial transactions, knowing that the property involved in the financial transaction represents the proceeds of some unlawful activit--with funds derived from a specified unlawful activity.

DOJ alleges Defendant "knowing that the property involved in a financial transaction represented the proceeds of some form of unlawful activity [wire fraud] conducted and attempted to conduct such financial transaction with in fact involved proceeds of specified unlawful activity

So what happens now? Defendant has been arrested and will make an initial appearance in federal court. At that initial appearance, he will be advised of his right to remain silent and his right to counsel. Defendant will then be informed of the charges against him.The Court will then take up the issue of pre-trial release. If Defendant is able meet the Court's pretrial release conditions, then he will be released from custody and remain on pretrial supervision pending either a dismissal, trial, or guilty plea.

Sentencing under the federal system is largely controlled by Sentencing Guidelines. The guidelines take into consideration several offense conduct characteristics including loss amounts and prior criminal history. Money laundering conduct is covered under Guideline § 2B1.1 (Theft) & § 2S1.1(a)(1) (Money Laundering). More specific offense conduct information (including total loss amount) is necessary to estimate the guidelines in this case. The greater the loss amount on the theft guideline, the higher the guideline offense level. The theft guideline is then grouped with the money laundering guideline to reached the estimated guideline imprisonment range. More on this later