The United States v. Chastain indictment unsealed two weeks ago was, in a way, previewed months ago in September 2021. That’s when Non-Fungible Token (NFT) marketplace OpenSea announced that Head of Product, Nathaniel Chastain, was asked to resign due to conduct that violated its obligation to responsibly maintain the NFT market. Prior to his resignation, a Twitter user asked OpenSea why Chastain’s digital wallet seemed to frequently buy NFTs right before they were promoted on OpenSea and then sell them after the promotional hype generated a price hike. Commentators believed this conduct fell through the cracks of federal insider trading law used to pursue those who misuse inside information regarding securities. But the Department of Justice (DOJ) took a different view; and on June 1, 2022, the U.S. Attorney’s Office for the Southern District of New York (SDNY) unsealed the indictment against Chastain, charging him with wire fraud and money laundering.

The Legal Theory in Play

Though the indictment does not claim the NFTs Chastain traded (about 45 in all) were securities—and thus subject to securities law—its language mirrors that commonly used in insider trading securities fraud cases. Those cases typically involve either a corporate insider trading in the company’s own shares (classic theory), or an outsider who trades based on material non-public information in violation of a duty owed to the source of that information (misappropriation theory). Here, the DOJ’s allegations have some elements of each theory alleging that Chastain breached duties he owed to OpenSea by misappropriating its inside information not about its own shares, but about which third-party NFTs would be featured on its homepage. Last year, the Securities and Exchange Commission (SEC) made headlines by extending misappropriation theory to charge a defendant who allegedly used inside information about their employer to trade shares not in that company, but in a competitor (AKA “shadow insider trading”). Now, it seems, it is the DOJ’s turn to push the envelope.