Facing up to 40 Years in Prison for About $57,000 from Insider Trading

You might have read recently that a New York jury convicted Nathaniel Chastain of insider trading. Chastain worked as a product manager for OpenSea, the largest online NFT marketplace. Chastain’s duties included selecting NFTs to be featured on OpenSea’s homepage. The identify of the NFTs to be featured was confidential information.

Chastain knew that the value of the featured NFTs typically increased by two to five times their purchase price once featured. Chastain took advantage of his choices for featured NFTs to purchase some of them before OpenSea featured them, the selling them to reap a profit. According to the Indictment, Chastain’s purchases included NFTs called “The Brawl 2,” “Flipping and Spinning” and “Spectrum of a Ramification Theory.” You can see each of them at OpenSea. I haven’t copied there here because copyright law for NFTs is up in the air.

What Exactly is an NFT Anyway?

“NFT” stands for “non-fungible token.” Let’s break the down. “Fungible” means that items are interchangeable because they are identical to each other for practical purposes. For example, money is fungible each has the same value as any other dollar. In Chastain’s case, bought and then sold pieces of art.

But isn’t one copy of a digital piece of art exactly the same as another? What makes them non-fungible? The answer is that the blockchain on which the NFT is stored distinguishes it with unique identification codes that make each copy different from the other.

The Indictment explains further:

NFTs are a type of digital asset stored on a blockchain, which is a digital, decentralized ledger that stores information, including information about transactions. Each NFT is typically associated with a digital object, such as a piece of digital artwork, and the NFT provides proof of ownership of that digital object and a license to use the object for specific purposes.

Essentially, you own an official copy of the item. Your ownership is established in the blockchain, which shows your purchase, the purchases of other, and transfer among purchasers.

Critics of the NFT model ask, “Why would I pay for a copy of an image when I can copy if off the Internet for free?” That’s a good question — and a topic for a different post — yet people can and do invest in NFTs.

Back to Chastain

Chastain bought NFTs and , knowing that once “featured” on OpenSea’s home page, they would become more valuable. Chastain set up anonymous accounts with OpenSea to make purchases. He also set up multiple Ethereum accounts to conceal his involvement in the scheme. A warning to those tempted: The FBI figured all this out but is tight-lipped about how they did it.

Wire Fraud

The Indictment against Chastain includes two “counts,” or formal charges of a crime. The first count is wire fraud. In essence, the wire fraud statute makes it illegal to defraud someone when you use any form of electronic communication to do it. The Justice Department routinely relies on the wire fraud statute to best white collar criminals because invariably they communicate electronically to commit crimes. In Chastain’s car, the bought and sole NFTs over the Internet by communicating electronically.

Money Laundering

When we think of money laundering, we think of drug dealers or maybe the TV series “ Ozark.” But in Chastain’s case included a money-laundering count because Chastain tried “to conceal and disguise the nature, the location, the source, the ownership, and the control” of his insider trading scheme. You don’t have to plough money into a legitimate business in order to withdraw “clean” money later. The money-laundering statute is much broader than that.

What’s Next?

Chastain’s sentencing is set for August 23, 2023. He faces a maximum sentence of 20 years in prison on each one of the two counts. Chastain reaped only about $57,000 from his insider trading. The prosecutor wants that money forfeited. We’ll see what happens. It’s a white collar crime, but the US Attorney’s office in Manhattan seems determined to make an example of Chastain.