Insider trading was an illegal practice long before non-fungible tokens (NFTs) ever existed. It is considered unethical and a breach of trust between an employee or agent and the company they are associated with. It is a very high-level form of cheating and the penalties often include jail time or prison as well as steep fines and an order to disgorge any profits that were gained by the information or losses that they used the insider information to avoid.
An arrest for the white-collar crime of insider trading can be made on civil or criminal charges in New York and those charges can come from the state or the federal government. It can also put a black mark on your record that can follow you for the rest of your life – even if you didn’t realize you were doing it.
If you have been accused of insider trading you need an experienced, knowledgeable defense attorney who is knowledgeable in NFTs and trading. This is not the time to wait and see what happens or try to take care of things yourself – that rarely works out well. You need a legal team you can trust that will work to protect your rights and act in your best interests.
What is insider trading?
Insider trading is a complex crime, and the lines can sometimes seem a little blurred – all the more reason to have a seasoned securities lawyer at your side. An individual may be charged with insider trading if they trade some type of securities, such as stock or NFTs of a public company but using key information (that is not public) about the company. In other words, the individual capitalizes on secret or proprietary information and uses that knowledge to get high returns on investments.
The U.S. Securities and Exchange Commission (SEC) is the regulatory agency for trading securities. They have created their own definition of insider trading which is, “Buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.”
Insider trading is a method of manipulating the value of stocks, NFTs, or other securities. The danger of this practice is that it could trigger a market collapse. And the right stock for the right price could trigger a massive collapse of the market.
An individual who gets information that is confidential or proprietary and uses the information either purposely or accidentally, for financial gain is called a constructive insider. This might be an employee, a reporter, or a stockbroker. It is still a form of insider trading, and it is still illegal.
What are the four elements of insider trading?
In an insider trading case, the burden of proof is on the government, the prosecution, to prove that the defendant or defendants in the case sold or bought at least one security “on the basis of material nonpublic information about that security or issuer” according to Title 17 – Commodity and Securities Exchanges, 17 CFR § 240.10b5-1 – Trading “on the basis of” material nonpublic information in insider trading cases.
It is the prosecutor’s responsibility to prove that the crime did indeed take place by meeting the four elements of insider trading:
- The defendant did indeed receive the information in question.
- The information was essential or material.
- The information was private, proprietary, or non-public.
- The information was used to directly influence the trade made by the defendant.
Since some NFTs are now being classified as securities and are under the purview of the SEC, this applies to trading them as well.
Is insider trading ever legal?
Insider trading that meets all four criteria is never legal. However, not everyone is on board with criminalizing insider trading. Some supporters argue that when trades based on non-public information are allowed it expedites the flow of new information to the market. This in turn enables more efficient and accurate pricing of securities.
Some proponents of insider trading decriminalization assert that allowing it brings deficiencies within the company to the surface which is an incentive for people who are most likely to possess that information to raise public awareness of it.
What are the defenses for insider trading?
There are several defenses your attorney may use for your insider trading case. It depends on the specifics of your case. Your lawyer will review your case and discuss it with you to determine the best possible defense.
- The transaction did not involve securities. This is very common with NFTs because not all tokens are classified as securities and the regulations are still being developed because the industry is still in its infancy.
- The information that the defendant had when making the trade was not both material and non-public.
- The defendant’s knowledge, intent, or deliberate recklessness cannot be established and connected to their activity in making the trade.
- The defendant gained the knowledge a little bit at a time, often from different sources, and used their own knowledge and reasoning to form a decision on the viability of the trade.
- The defendant relied on good faith that the trade would be legal when trusting the advice of counsel after they disclosed to counsel all relevant circumstances and facts.
- The defendant is subject to the Safe Harbor defense under Rule 10b5-1. The defendant had entered into a binding contract, plan, or instruction in good faith that they were subject to and 1) they were not aware of the information when they entered into it; 2) it specified prices, amounts, and dates for the transactions; 3) barred the individual from influencing when, how, or if the transactions would occur.
Can NFTs have shares and be traded?
NFTs are digital assets that are used to represent real-world investments like digital art, videos, and other content. Each NFT token is unique, so they are not interchangeable. This provides them with digital scarcity which can drive up the value.
NFTs are fractional, meaning that they are easily divisible. When attached to a big-ticket asset, NFTs can be fractionalized, meaning they can be divided and broken down that price into smaller portions. This has the unique advantage of making NFTs and investing more accessible to individuals who want to invest but don’t have the typical larger budget.
NFTs open the marketplace for a more diverse demographic, allowing everyday people to invest in assets that would otherwise have been out of their reach.
Because of these characteristics, the SEC has classified certain NFTs as securities. This brings them under the regulatory control of the agency.
What is the OpenSea controversy?
On August 22, 2023, the U.S. Attorney’s Office, Southern District in New York issued a press release stating that OpenSea product manager, Nathanial Chastain had been convicted and sentenced for insider trading using NFTs.
Chastain used confidential information regarding certain NFTs that OpenSea was going to feature on its homepage to manipulate the market for his own financial gain.
Chastain had been employed by Ozone Networks, Inc. d/b/a OpenSea, and part of his job function was to select the NFTs that the company would feature on its home page. OpenSea kept the identity of the NFTs confidential until they were publicly posted on the homepage.
Chastain had seen that after OpenSea featured a token on its homepage, that particular token would increase in value as well as other tokens that the creator had made. Featuring the token on the company’s page would drive up the value for all of that specific creator’s tokens and Chastain saw that as an opportunity to make some money.
He used that confidential information to secretly purchase a high volume of NFTs right before they went public on the site. Once they were featured on the site, the price would increase, and Chastain would sell them for up to five times more than his original purchase price.
Chastain used anonymous accounts on OpenSea and anonymous digital currency wallets in an effort to conceal his identity and the fraud he was committing.
Chastain was sentenced to three months in prison, three months in home confinement, and three years of supervised release. He was also fined $50,000 and ordered to forfeit what he made when he traded the NFTs in question.
What is the biggest problem with NFT?
Critics of NFT have a long list of issues that they’ve cited as a problem, ranging from environmental concerns to increased fraud potential. The newness of the technology does make it somewhat unstable simply because of a lack of adequate regulation. Federal and state lawmakers are working to tighten the regulation of NFTs, and New York is leading the charge with a very aggressive, comprehensive set of laws – but it takes time for the laws to catch up and go into effect.
In the meantime, investors, sellers, buyers, and creators of NFTs are wise to retain experienced legal counsel. Having an attorney who understands NFTs and cryptocurrency, who keeps up with existing and emerging laws in the industry, and who has experience with fraud as well as criminal defense is a true asset.
One of the primary issues being raised about NFTs, especially in regard to NFTs as securities, is that the level of security needed to protect their investors and users is less than satisfactory.
The NFT marketplace is centralized, typically hosted on third-party websites which means separate servers. This leaves the NFTs with a certain degree of vulnerability and subsequent security risks are a significant concern.
This leaves them vulnerable to many of the common financial schemes and frauds. Laws are being expanded to include NFTs and cryptocurrencies, but there are areas that those laws are not equipped to touch. Lawmakers still struggle to keep up to a certain degree with its rapid growth and expansion. AI and NFT are two very current examples of this.
New York Securities Attorney for NFT Investments
If you have been arrested for insider trading or believe that you might be under investigation, you need to talk to an experienced, knowledgeable attorney right away. When you call The Litvak Law Firm you will get a skilled legal team with more than a decade of combined experience.
You can’t afford to wait or try to take care of your case on your own. Call today at 718-989-2908 and get the representation that you deserve.