NFT Insider Trading Conviction Overturned: Ex-OpenSea Exec Cleared on Appeal

A significant legal victory for former OpenSea product manager Nathaniel Chastain has seen his insider trading conviction overturned by a U.S. federal appeals court. The ruling, which vacates Chastain's wire fraud and money laundering conviction, stems from flawed jury instructions that blurred the lines between unethical behavior and criminal activity.

Key Takeaways

• Conviction Overturned: Nathaniel Chastain's insider trading conviction related to NFTs has been reversed.

• Flawed Jury Instructions: The appeals court cited erroneous guidance given to the jury as the primary reason for the reversal.

• Property Interest Debate: The ruling hinges on whether the information used constituted a "property interest" with commercial value.

• Legal Ambiguity: The decision raises questions about applying existing fraud laws to the rapidly evolving digital asset space.

The Case Against Chastain

Nathaniel Chastain, formerly a product manager at the leading NFT marketplace OpenSea, was accused of leveraging his insider knowledge. He allegedly purchased NFTs just before they were featured on OpenSea's homepage, subsequently selling them for a profit after the increased visibility drove up their prices. Prosecutors had labeled this case as the first insider trading prosecution involving digital assets in the U.S. Chastain was arrested in June 2022, convicted in May 2023, and sentenced to three months in prison.

The Appeals Court's Decision

The 2nd U.S. Circuit Court of Appeals in Manhattan, in a 2-1 decision, agreed with Chastain's appeal. The court found that the trial court's instructions to the jury were flawed, allowing them to convict Chastain for misusing internal information even if that information did not have a tangible commercial value to OpenSea. The judges stated that fraud, under the law, must involve the misappropriation of a property interest, not merely unprofessional business conduct.

One of the judges noted that if merely acting unethically or departing from "traditional notions of fundamental honesty and fair play" were sufficient for a conviction, "almost any deceptive act could be criminal."

Defense Arguments and Broader Implications

Chastain's defense also highlighted claims that OpenSea co-founder Devin Finzer had engaged in similar behavior by trading tokens based on company information. While the court did not rule on Finzer's actions, it acknowledged the claim as part of the defense's argument that OpenSea may not have consistently enforced its own policies.

The ruling has significant implications for how U.S. law can be applied to misconduct within the cryptocurrency and NFT sectors. It suggests that prosecutors may need to more clearly demonstrate the commercial value of information used in such schemes to secure convictions. It remains unclear whether prosecutors will attempt to retry Chastain.

Sources

• U.S. court overturns NFT insider trading conviction of former OpenSea exec, CryptoRank.

• US appeals court overturns first NFT insider trading conviction, Reuters.

• Court Overturns Fraud Conviction of OpenSea’s Nate Chastain, The Defiant.

• Ex-OpenSea Employee Cleared in First NFT Insider Trading Appeal, Cryptonews.

• U.S. overturns NFT insider trading conviction of ex-OpenSea exec, Cryptopolitan.