A former employee at the NFT marketplace OpenSea was ordered to spend three months behind bars after being convicted in the first-ever insider-trading case involving digital assets.
Nathaniel Chastain, who used confidential information as head of product at OpenSea to make thousands of dollars, was sentenced Tuesday by US District Judge Jesse M. Furman in New York, after a jury found him guilty in May of wire fraud and money laundering. He was also ordered to forfeit 15.98 Ethereum tokens, worth about $26,000, and pay a $50,000 fine.
Chastain was responsible for choosing which tokens would be featured on OpenSea’s home page, which usually boosted prices. Prosecutors said he bought dozens of NFTs before they were highlighted, and sold them immediately afterwards for as much as five times what he paid, making more than $57,000 at the time.
“I am here today because two years ago I let down the community I was serving and lost sight of the person I aspired to be,” Chastain, 33, said at the hearing. “I’m sorry for putting my colleagues and friends at OpenSea through this ordeal.”
The case against Chastain could mark a path for prosecutors to crack down on fraud in new and nontraditional markets for digital assets such as cryptocurrencies and NFTs while regulations are still being developed.
Most traditional insider-trading cases, are centered around securities-fraud charges for buying and selling shares based on knowledge of non-public information details. But Chastain was charged with wire fraud – accused of misappropriating confidential business information.
That novel approach brought criticism from hundreds of defense attorneys, who wrote in support of Chastain’s bid to dismiss the case before trial. They argued that success in the case would “distort insider-trading law” and allow prosecutors to bring fraud charges against anyone who used information they gleaned from their employer for non-work purposes — such as a whistleblower who provides information about corporate wrongdoing to a journalist.
Chastain, meanwhile, had also argued that he was not guilty of wire fraud because the NFTs were not securities or commodities. While Furman said prosecutors may not have been able to prove that the details of what NFTs would be featured on the site were OpenSea’s property, he declined to dismiss the indictment, saying the law doesn’t require trading in securities or commodities for it to be fraud.
Manhattan US Attorney Damian Williams used a similar approach to charge a former Coinbase Global Inc. manager for trading on confidential information about when the exchange was going to list new tokens. Williams has made prosecution of crypto fraud a central tenet of his term as Wall Street’s top cop.
“Nathanial Chastain faced justice today for violating the trust that his employer placed in him by using OpenSea’s confidential information for his own profit,” Williams said in a statement. “Today’s sentence should serve as a warning to other corporate insiders that insider trading – in any marketplace – will not be tolerated.”
‘Unusually Difficult’ Case
Furman said he found the sentence “unusually difficult” given the nature of the charges, and questioned whether the case would have been brought if it had not been “in a slightly sexy new arena.” But he said Chastain “knew exactly what he was doing.”
“There were some ambiguities at OpenSea at the time, it was a fairly new company,” Furman said, but Chastain’s reaction when he was first confronted by executives at the company “makes it abundantly clear he knew what he was doing and he took advantage of an opportunity.”
Chastain had faced as long as 20 years in prison on each count, although federal sentencing guidelines called for 21 months to 27 months. Prosecutors had asked the judge to impose a sentence within that range, saying such a punishment is needed to send a message to potential fraudsters.
“Robust sentences for fraudulent conduct in new and emerging markets are needed not only to deter others in those specific markets from engaging in fraud, but to impress upon others who may be tempted to cheat in any future market that fraud will not be tolerated,” prosecutors said in a sentencing memo.
Chastain, however, sought to stay out of prison and asked Furman for probation. His lawyers said media coverage of the case has already sent the message that prosecutors are cracking down.
Ether is the second-largest cryptocurrency by market value, after Bitcoin. Most NFTs are traded on the Ethereum blockchain.