SDNY and SEC bring first cryptocurrency insider trading case

United States Publication July 2022

In the midst of the "crypto winter," cryptocurrency enforcement activity is heating up. On July 21, 2022 the US Attorney's Office for the Southern District of New York (SDNY) and Securities and Exchange Commission (SEC) brought the first insider trading case involving cryptocurrency against a former cryptocurrency exchange employee and his brother and friend, following last month's first ever indictment for insider trading involving non-fungible tokens. In a prior New York Law Journal article, we discussed the mounting prevalence of frauds and other crimes utilizing cryptocurrency, how these crimes often resemble conventional crimes with which the public is all too familiar, and enforcement agencies' response: funneling resources to the cryptocurrency space to address such crimes. These insider trading charges are the latest example of traditional crimes being committed through cryptocurrencies and, given the continued direction of enforcement efforts towards the cryptocurrency space, they are unlikely to be the last.

According to the indictment and the SEC's complaint, the employee of the cryptocurrency exchange tipped his brother and friend about several cryptocurrency assets the exchange planned to publicly announce it was listing, or considering listing, on its exchanges. The announcement of those listings on the exchange often caused the prices of those assets to increase. The crypto exchange's confidentiality and trading policies specifically identified such information as material non-public information and barred its disclosure even to certain other employees.

Despite knowing of these restrictions, on approximately fourteen occasions the employee allegedly tipped the two other defendants about the upcoming listings, thereby enabling them to trade ahead of those announcements and earn profits of approximately US$1.5m. As part of this scheme, the defendants allegedly used anonymous or newly-opened Ethereum blockchain wallets, or wallets opened in the names of others, to obscure their identity. However, law enforcement linked these wallets to the defendants through internet protocol (IP) address records and blockchain analysis. The SDNY indictment charges the defendants with multiple counts of wire fraud and conspiracy to commit wire fraud, and the SEC complaint alleges violations of the Exchange Act Section 10(b) and Rule 10b-5 thereunder.

Although using a novel asset, these insider trading charges bear all the hallmarks of a conventional insider trading tipping scheme. Although SDNY's charges under the federal wire fraud statute are applicable regardless of the asset, the SEC's charges under the federal securities laws require it to prove that the relevant cryptocurrencies meet the definition of "securities" under federal law. The question of whether cryptocurrency assets are securities is a hotly contested issue, and will likely continue to be debated. These charges, however, demonstrate that the government will not be deterred by technical arguments regarding whether or not cryptocurrencies meet the legal definition of "security." Indeed, despite going to great lengths to allege facts showing that the cryptocurrencies at issue meet the definition of "securities," the SEC stated in a press release that its goal is to ensure a level playing field for investors, and that it is unconcerned about the label placed on the assets. Notwithstanding this issue, these charges reinforce that cryptocurrency crimes often resemble conventional offenses, albeit with a modern twist, and demonstrate law enforcement agencies' continued focus on cracking down on cryptocurrency crimes.

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