SEC and DOJ Charge Employee of Digital Asset Trading Platform and His Associates With Alleged Insider Trading in Digital Assets

August 30, 2022

On July 21, 2022, the Securities and Exchange Commission and the U.S. Attorney’s Office for the Southern District of New York charged Ishan Wahi, a former employee of the digital asset trading platform Coinbase, as well as his brother and friend, with engaging in insider trading ahead of certain of the Company’s digital asset listing announcements (i.e., announcements in which the Company publicly discloses the specific digital assets that it plans to make available for trading on its platform), which allegedly generally increase the value of the relevant digital assets.

According to the charging documents, Wahi tipped his associates to the pending Company announcements, and they in turn used their advance knowledge to front run the announcements, allegedly reaping more than $1 million in illicit gains.   The SEC’s Complaint, filed in the Western District of Washington, alleges that Wahi and his associates violated the antifraud provisions of the Securities Exchange Act of 1934, and the DOJ’s Indictment alleges that they committed various counts of wire fraud and conspiracy to commit wire fraud.  The defendants have indicated they will contest such allegations.  Neither the Complaint nor the Indictment names Coinbase as a defendant. These parallel actions are the first-of-their-kind insider trading enforcement actions in the digital asset context. These actions are notable, among other reasons, because they show the SEC’s comfort with a “regulation by enforcement” strategy and its broad interpretation of what constitutes a “security” subject to its jurisdiction, and the DOJ’s willingness to challenge allegedly fraudulent conduct in the digital asset industry through charges, such as wire fraud, that do not require a showing that the relevant digital assets are “securities.”  The latter suggests that the DOJ could become an increasingly important player in this space independent of the SEC’s or the Commodities Futures Trading Commission’s current or future regulatory agenda or authority.

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