On July 21, 2022, the US Department of Justice (DOJ) unsealed an indictment charging Ishan Wahi (Wahi), a former product manager at a large cryptocurrency trading platform (the Platform)—along with his brother Nikhil Wahi (Nikhil) and friend Sameer Ramani (Ramani)—with wire fraud and conspiracy to commit wire fraud for an alleged insider trading scheme using Wahi’s position to funnel confidential information to the others regarding digital assets set to be listed on the Platform before their public announcement.[i] On the same day, the Securities and Exchange Commission (SEC) filed a first-of-its-kind civil action against the trio alleging they violated federal securities laws because the SEC alleges that certain of the digital assets are securities.[ii] The DOJ’s action appears to signal an emerging trend of “insider trading” prosecutions in the digital asset space, and the potential effects of the SEC’s civil claims could have dramatic implications for actors in the digital asset space, especially trading platforms.
According to the indictment, Wahi began working at the Platform as a product manager in October 2020. In this role, Wahi was involved in the process of listing new digital assets on the Platform, and had access to highly confidential information, including (1) which assets would be listed on the Platform, and (2) the timing of public announcements for the listings. In particular, during the period of the alleged criminal activity, Wahi was a member of a small, private chat group used to discuss the precise dates and timeline for announcements and launch dates. Wahi allegedly tipped off either Nikhil or Ramani before major announcements, to capitalize on the value bump digital assets often receive following listing announcements by the Platform. Nikhil and Ramani used various exchange accounts held in others’ names to purchase the digital assets, and then transferred the funds to anonymous Ethereum wallets. The trio allegedly obtained at least $1.1 million in illicit profits from the scheme.
In addition to the DOJ’s indictment, the three men face civil claims filed by the SEC, which alleges they violated Section 10(b) and Rule 10b-5 of the Securities Exchange Act by engaging in their scheme. The complaint marks the first time the SEC has brought an insider trading action related to digital assets. While the DOJ refrained from filing securities fraud charges, instead charging the defendants with wire fraud and conspiracy to commit wire fraud, the SEC’s complaint alleges that at least nine of the assets involved are securities under the Howey test, including assets that are considered utility tokens or offered by decentralized autonomous organizations.[iii] It alleges, among other things, that the assets were securities because they were sold to investors to raise funds for the issuer’s businesses while the issuers asserted their efforts would increase the tokens’ value, and that the assets could be resold on secondary markets.
The SEC’s complaint comes at a time when regulatory jurisdiction over digital assets is at a critical juncture. On June 7, US Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) proposed bipartisan legislation to overhaul the framework for digital assets regulation, including classifying most digital assets as commodities and empowering the Commodities Futures Trading Commission (CFTC)—rather than the SEC—to regulate most of the industry.[iv] A ruling that these assets are securities could further cloud the very issues the legislation seeks to clarify and greatly expand the SEC’s jurisdiction over the digital asset industry. In a rare public statement about another agency’s litigation, Caroline D. Pham, a CFTC Commissioner, characterized the action as “regulation by enforcement,” echoing concerns about …….
Source: https://www.jdsupra.com/legalnews/cryptocurrency-insider-trading-takes-2035207/