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This is the second part of my column about the crackdown on insider trading involving crypto. In the first part, I discussed the criminal indictment of Nathaniel Chastain, a former product manager at the OpenSea NFT marketplace. I also discussed the SEC\u2019s allegations against former Coinbase employee Ishan Wahi, his brother and his friend, based on the \u201cmisappropriation\u201d theory of insider trading.<\/b><\/p>\n
Powers On\u2026<\/i><\/b> is a monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an adjunct professor at Florida International University College of Law, where he teaches \u201cBlockchain & the Law.\u201d<\/span><\/i><\/p>\n Since the <\/span>United States v. O\u2019Hagan<\/span><\/i> Supreme Court case in 1997, the misappropriation theory of insider trading liability has been explicitly recognized. Both before that date and after, \u201cmisappropriation\u201d of company secrets or confidential information used in connection with stock trading has been an active area of Securities and Exchange Commission enforcement and criminal prosecutions.<\/span><\/p>\n Examples include a former writer for The Wall Street Journal in <\/span>United States v. Winans; <\/span><\/i>employees at the magazine stand Hudson News in <\/span>Securities Exchange Commission v. Smath<\/span><\/i>; a printer at a company that printed tender offer documents in <\/span>Chiarella v. United States<\/span><\/i>; and more recently, financial analysts in <\/span>United States v. Newman<\/span><\/i> and <\/span>Salman v. United States<\/span><\/i>. On the same date as the SEC filing against Ishan Wahi and his two associates, the U.S. attorney for the Southern District of New York unsealed a parallel criminal indictment that charged these same three defendants with wire fraud and wire fraud conspiracy.<\/span><\/p>\n Tippees that receive material, nonpublic or confidential information from a tipper violate insider trading rules if they know the tipper breached a duty they owed to another and received some sort of personal benefit from the tip. The Supreme Court said in the 2016 <\/span>Salman<\/span><\/i> case that the personal benefit need not be financial or pecuniary. The benefit requirement is satisfied by bestowing a gift of this information on a trading relative or a close friend.\u00a0<\/span><\/p>\n Frankly, it\u2019s about time that the SEC and U.S. attorney\u2019s offices focused on real crimes and fraud. This is precisely what insider trading is: fraud. It\u2019s an unfair trading advantage by someone who learns confidential information and trades on it for economic gain and profits. But this <\/span>Wahi<\/span><\/i> case begs the question of what exactly insider trading is. As I stated before, insider trading involves trading in \u201csecurities.\u201d Accordingly, to bring its case, the SEC is alleging that at least nine of the tokens listed on Coinbase and traded in advance by the defendants fit within the \u201cinvestment contract\u201d analysis of the Howey test. But do they really?<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n The SEC says that some of the tokens are \u201cpurported\u201d to be governance tokens but are \u201csecurities.\u201d So, it is worth noting this warning shot. For those token issuers taking comfort from lawyers who have decreed their tokens non-securities because they are governance tokens, beware \u2014 and perhaps get another opinion from a qualified securities lawyer.\u00a0<\/span><\/p>\n Apart from the interesting aspects of this particular case, what does it mean for others, such as Coinbase itself? Well, the SEC is claiming that certain tokens on its exchange are \u201csecurities.\u201d If that is so, then Coinbase should be registered as a \u201csecurities exchange\u201d pursuant to the Securities Exchange Act of 1934. Not surprisingly, a few days after the SEC filing, it was reported that Coinbase was under SEC investigation.<\/span><\/p>\n My view is that SEC Chairman Gary Gensler is using this case as a further \u201cland grab\u201d to take jurisdiction over digital assets \u2014 and crypto specifically \u2014 away from the Commodity Futures Trading Commission. <\/span>I have said this before<\/span>. Indeed, CFTC Commissioner Caroline D. Pham also sees through the SEC\u2019s efforts.<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Subscribe for thoughtful explorations and leisurely reads from Magazine.<\/p>\n<\/div>\n By subscribing you agree to our Terms of Service and Privacy Policy<\/div>\n<\/div>\n \u00a0<\/p>\n \u00a0<\/p>\n On the day of the complaint filing, she <\/span>issued<\/span> a public statement, saying: \u201cThe SEC\u2019s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together. Major questions are best addressed through a transparent process that engages the public to develop appropriate policy. [\u2026] Regulatory clarity comes from being out in the open, not in the dark.\u201d<\/span><\/p>\n Pham also said, \u201c<\/span>SEC v. Wahi <\/span><\/i>is a striking example of \u2018regulation by enforcement.\u2019\u201d Four days later, on July 25, CFTC Chair Rostin Behnam spoke at the Brookings Institute and echoed the view that the CFTC would be the natural and best regulator to have oversight over crypto.<\/span><\/p>\n\n\n\nThe best of blockchain, every Tuesday<\/h3>\n