Shalini Nagarajan

Former <a href="https://blockworks.co/tag/opensea" target="_blank" rel="noreferrer noopener">OpenSea</a> product manager, Nate Chastain, awaits his fate as the jury begins deliberating whether he is guilty of purported trading shenanigans.



Their decision, which commenced on Monday, could significantly impact the world of non-fungible tokens (NFTs) and the reputation of the prominent NFT marketplace. [UPDATE: <a href="https://blockworks.co/news/opensea-nft-nate-chastain-wire-fraud">Chastain was found guilty</a> on May 3rd, 2023.]



Chastain found himself in legal trouble in June last year <a href="https://blockworks.co/news/former-opensea-exec-charged-with-nft-insider-trading">when he was charged</a> in Manhattan for allegedly making $50,000 in unlawful gains. According to US prosecutors, he bought some NFTs and then promptly featured them on OpenSea’s website before selling them once their value shot up.&nbsp;



He allegedly made profits two to five times the original purchase price, while keeping things on the down-low with anonymous digital currency wallets and covert accounts on OpenSea.



Chastain’s lawyer, Daniel Filor, argued that the case was not about whether his client’s trades were questionable, but about whether he had a sneaky plan to defraud OpenSea, Reuters <a href="https://www.reuters.com/legal/ex-opensea-employee-made-free-money-off-nfts-prosecutor-says-2023-05-01/">reported</a> on May 2.



The lawyer added that the trades didn’t break any of the company’s rules.



OpenSea might have been a little slow on the draw with their policies — it updated rules only after Chastain was charged — but they weren’t afraid to give him the boot.



An OpenSea spokesperson <a href="https://blockworks.co/news/former-opensea-exec-charged-with-nft-insider-trading">told Blockworks that they asked him to resign</a> in September 2021 because his trades were in “direct conflict” with their “core values and principles.”



In the heat of the trial’s closing argument on Monday, prosecutor Thomas Burnett accused Chastain of letting his greed guide his actions.



According to Burnett, Chastain knew that he was meant to display NFTs on the website designed to profit the company, not himself. He also accused Chastain of trying to pull a fast one by using anonymous accounts to trade NFTs, suggesting that he knew his actions were shady.



If Chastain believed his actions were above board, he could have easily used his regular accounts. Instead, he tried to throw people off the scent, the lawyer said.



But some at OpenSea have rallied to Chastain’s defence. Recent <a href="https://blockworks.co/news/opensea-ceo-nft-insider-trading-case-unfair-ahead-of-trial">court documents showed</a> that CEO Devin Finzer told prosecutors that the case against Chastain is “unfair” and affecting the former staffer’s mental health.



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OpenSea Insider Trading Case Goes to Jury

<div id="highlights-block_635659a0b0afa" class="highlights">
 <ul>
 <li>Judge Jesse Furman shot down Chastain’s argument, labeling it “wholly without merit”</li>
 <li>Furman however said “insider trading” may be misleading in this case and can be struck from the indictment</li>
 </ul>
 
</div>



Nate Chastain, the former OpenSea employee accused of an insider NFT trading scheme, was unable to convince a judge to dismiss his indictment, allowing the case to go ahead.



The Department of Justice in June <a href="https://cms.blockworks.co/former-opensea-exec-charged-with-nft-insider-trading/" target="_blank" rel="noreferrer noopener">charged</a> Chastain with wire fraud and money laundering over a series of allegedly dodgy trades which occurred during his tenure as OpenSea’s head of product between January and September 2021.



Authorities say Chastain used confidential information regarding which NFTs would be featured on OpenSea’s homepage, leveraging that knowledge to secretly purchase dozens of tokens just before they appeared.&nbsp;



Chastain subsequently profited by selling those NFTs, while using anonymous digital wallets and accounts on OpenSea to conceal his moves, according to the DOJ. He allegedly generated at least <a href="https://cms.blockworks.co/opensea-ex-employee-asks-court-to-dismiss-insider-trading-case/" target="_blank" rel="noreferrer noopener">19 ETH</a> ($25,500, current price) through the trades, based on information from his known wallets. 



Chastain <a href="https://cms.blockworks.co/openseas-nate-chastain-calls-it-quits-after-insider-trading-allegations/" target="_blank" rel="noreferrer noopener">resigned</a> from OpenSea after being suspected of misappropriating insider information in September 2021. At the time, a <a href="https://twitter.com/0xZuwu/status/1437921263394115584" target="_blank" rel="noreferrer noopener">number</a> of NFT <a href="https://twitter.com/RiceFarmerNFT/status/1437956088998072325" target="_blank" rel="noreferrer noopener">traders</a> flagged on Twitter that a wallet belonging to Chastain was routinely at the center of transactions involving NFTs that would show up on OpenSea’s featured portal.



<a href="https://www.reuters.com/technology/opensea-employee-charged-with-insider-trading-nfts-2022-06-01/" target="_blank" rel="noreferrer noopener">Reuters reported</a> he was accused of secretly buying 45 NFTs on 11 different occasions as part of an insider trading scheme. In one such event, his purchase and sale of the NFT “Spectrum of a Ramification Theory” on Sept. 14, 2021 more than quadrupled his profits on that particular trade.



Chastain <a href="https://cms.blockworks.co/opensea-ex-employee-asks-court-to-dismiss-insider-trading-case/" target="_blank" rel="noreferrer noopener">attempted</a> to have the charges dropped, with his counsel arguing that the existence of securities or commodities trading is an essential element of any insider trading offense — NFTs are neither of those, they contended. But this dispute has failed to convince the case’s judge.



The lawyers also claimed the government cannot prove charges of money laundering, as Chastain’s crypto transactions in question were conducted on the Ethereum blockchain and thus “completely visible to the public.”



<h3 class="wp-block-heading">Chastain case not exactly &#8216;insider trading&#8217;</h3>



In <a href="https://casetext.com/case/united-states-v-chastain-16" target="_blank" rel="noreferrer noopener">denying the motion</a> to dismiss on Oct. 21, Judge Jesse Furman said Chastain isn’t charged with insider trading in the “classic sense of the term.” 



He is charged with wire fraud that makes no reference to either securities or commodities and instead relates to “obtaining money or property by means of false or fraudulent pretenses.” So, his argument is “wholly without merit,” the judge said.



Furman pointed to another case as a reference point to make clear that Chastain’s counsel hadn’t made a solid argument.&nbsp;In that case, a Wall Street Journal reporter entered into a scheme with traders to share the timing and contents of a column so they could use it to make profits.



“The columnist and traders were charged with, and convicted of, both securities fraud and mail and wire fraud,” the judge said. They had argued to reverse the convictions on grounds that the information in question was not “property.” Yet the court ruled that the publication schedule and contents of the newspaper column constituted property within the wire fraud statute.



“No court has suggested, let alone held, that conviction in such a case requires trading in securities or commodities,” the judge said.&nbsp;



The judge acknowledged, though, that the term “insider trading” may be misleading in Chastain&#8217;s case. The appropriate remedy, he said, would be to strike that phrase from the indictment. This would also prevent the government from using it at trial.



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Former OpenSea Exec’s NFT ‘Insider Trading’ Case Will Continue

Sebastian Sinclair

<div id="highlights-block_63046e1ef4911" class="highlights">
 <ul>
 <li>Former OpenSea product manager Nate Chastain was indicted by the DoJ in June on two charges of wire fraud and money laundering related to insider NFT trading</li>
 <li>Chastain&#8217;s lawyers are arguing NFTs don’t constitute securities or commodities, which they say undermines the DoJ&#8217;s case</li>
 </ul>
 
</div>



Lawyers for a former OpenSea employee accused of insider trading filed a <a href="https://storage.courtlistener.com/recap/gov.uscourts.nysd.580756/gov.uscourts.nysd.580756.19.0.pdf" target="_blank" rel="noreferrer noopener">motion</a> to dismiss related charges last week, arguing the assets don’t constitute securities or commodities.



Nate Chastain, who served as an OpenSea product manager between January and September 2021, was <a href="https://www.justice.gov/usao-sdny/pr/former-employee-nft-marketplace-charged-first-ever-digital-asset-insider-trading-scheme" target="_blank" rel="noreferrer noopener">indicted</a> by the Department of Justice (DoJ) in June on two charges of wire fraud and money laundering based on insider NFT trading.



It’s the first time the DoJ has brought such charges against an individual involving NFTs, the department wrote in a statement at the time.&nbsp;



Each charge of money laundering and wire fraud carries a maximum penalty of 20 years, meaning Chastain is technically staring down a maximum sentence of 40 years imprisonment.



Chastain’s lawyers <a href="https://storage.courtlistener.com/recap/gov.uscourts.nysd.580756/gov.uscourts.nysd.580756.19.0.pdf" target="_blank" rel="noreferrer noopener">filed their motion</a> in the US Southern District Court of New York last week claiming the government brought forward charges using “ill-founded applications” of criminal law to establish a precedent.



Specifically, the DoJ alleges Chastain used confidential company information to trade NFTs before they were featured on OpenSea’s homepage for “two to five times profit,” between June and September last year.



Chastain is believed to have generated at least 19 ETH ($30,000) through such trades, It’s been estimated based on Chastain’s known wallets. His alleged dealings were first <a href="https://twitter.com/0xZuwu/status/1437921263394115584" target="_blank" rel="noreferrer noopener">discovered</a> by a Twitter user last September, roughly nine months before the DoJ laid charges.



“The rub, however, is that the NFTs are neither securities nor commodities,” the lawyer wrote in their motion.



Any insider trading theory, even under case law, requires trading in securities and commodities, they wrote, while pointing out what they see as the US government’s “flawed understanding” of the circumstances.



Without that connection to financial markets, insider trading “in any form or context” cannot exist, the lawyers argue.&nbsp;



For what it’s worth, lawyers representing Ishan Wahi, the former Coinbase product manager also charged over alleged insider trading, have <a href="https://cms.blockworks.co/ex-coinbase-employee-accused-of-insider-trading-pleads-not-guilty/" target="_blank" rel="noreferrer noopener">based their case</a> on almost exactly the same argument.



Lawyers also claimed Chastain&#8217;s insider information had no inherent economic or market value, which they believe should lead to the wire fraud charge being tossed.



On the charges of money laundering against Chastain, the lawyers wrote the transparent nature of the Ethereum blockchain, where the NFTs were traded, meant the transactions were visible to the public and could not be demonstrated as concealing unlawful proceeds.



“The defendant did nothing more than move money in an obvious and perceptible manner, they said. “The simple and manifest movement of money, however, does not constitute money laundering.”



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OpenSea Ex-Employee Asks Court to Dismiss Insider Trading Case

<div id="highlights-block_62bd517a9613f" class="highlights">
 <ul>
 <li>A Customer.io employee shared email addresses with an unauthorized external party</li>
 <li>OpenSea warned users of fraudsters trying to impersonate the platform by using fake domain names</li>
 </ul>
 
</div>



Collectibles platform OpenSea has alerted customers to a data breach after staff found email addresses were shared with an external party.



Head of Security Cory Hardman said in a <a href="https://opensea.io/blog/safety-security/important-update-on-email-vendor-security-incident/" target="_blank" rel="noreferrer noopener">blog</a> post on Wednesday that an employee of <a href="https://customer.io/">Cust</a><a href="https://customer.io/" target="_blank" rel="noreferrer noopener">o</a><a href="https://customer.io/">mer.io</a>, OpenSea’s email delivery vendor, abused their access by downloading and externally sharing customer data.&nbsp;



“If you have shared your email with OpenSea in the past, you should assume you were impacted,” he wrote. “We are working with Customer.io in their ongoing investigation, and we have reported this incident to law enforcement.”



The company further warned customers might face phishing attacks&nbsp;— attempts by cybercriminals posing as credible institutions with an aim to obtain sensitive information — by using a domain name similar to the official “opensea.io,” such as “opensea.org” or “opensae.io.”



<a href="https://twitter.com/econoar/status/1542343306704732162?s=20&amp;t=Uf4dK_Yi0L8D7GG73hfZ6Q" target="_blank" rel="noreferrer noopener">Screenshots</a> posted to Twitter show OpenSea notified customers about the data breach via email. Some users <a href="https://twitter.com/Didzis68904323/status/1542363159230652416" target="_blank" rel="noreferrer noopener">demanded</a> compensation.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">OpenSea data breach. <a href="https://t.co/FEtDKsoHje">pic.twitter.com/FEtDKsoHje</a>&mdash; eric.eth (@econoar) <a href="https://twitter.com/econoar/status/1542343306704732162?ref_src=twsrc%5Etfw">June 30, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Customer.io told Blockworks that the employee in question has been suspended and had access removed, pending an internal investigation. &#8220;We are working closely with OpenSea and are reviewing exactly how these email addresses were compromised,&#8221; a spokesperson for the vendor company said.



A similar incident occurred in March, when hackers <a href="https://cms.blockworks.co/nydig-blockfi-pantera-circle-all-targeted-in-hubspot-data-breach/" target="_blank" rel="noreferrer noopener">breached</a> third-party marketing vendor HubSpot to target large crypto stakeholders. NYDIG, Pantera Capital, <a href="https://twitter.com/BlockFi/status/1504982848771608586?s=20&amp;t=nEdl35DgSTJHl-INlo8Z_g" target="_blank" rel="noreferrer noopener">BlockFi</a>, Circle and <a href="https://twitter.com/SwanBitcoin/status/1505261139571191813?s=20&amp;t=Cod2RQU8PdmBbXcAxeuF-A" target="_blank" rel="noreferrer noopener">Swan Bitcoin</a> were among the affected companies.



OpenSea found itself in a sea of trouble thanks to another incident prior the data breach. The Department of Justice earlier this month charged its former head of product, Nathaniel Chastain, with <a href="https://cms.blockworks.co/former-opensea-exec-charged-with-nft-insider-trading/" target="_blank" rel="noreferrer noopener">insider trading</a> in connection to non-fungible tokens (NFTs). He was charged with one count of wire fraud and another count of money laundering.



Chastain <a href="https://cms.blockworks.co/openseas-nate-chastain-calls-it-quits-after-insider-trading-allegations/" target="_blank" rel="noreferrer noopener">resigned</a> from his position at OpenSea in September after he was suspected of profiting from inside information and purchasing NFTs before they were posted publicly.



OpenSea remains the leading marketplace by volume by a wide margin, with over six times the sales of the second-largest NFT marketplace over the past 30 days, according to data from <a href="https://dappradar.com/nft/marketplaces" target="_blank" rel="noreferrer noopener">DappRadar</a>.



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OpenSea Warns of Phishing Attacks Due to Data Breach

Ornella Hernandez

<div id="highlights-block_6297ac2cee459" class="highlights">
 <ul>
 <li>The case is considered to be first indictment in a digital asset insider trading scheme</li>
 <li>Chastain resigned as OpenSea’s product manager in September</li>
 </ul>
 
</div>



The Department of Justice has indicted former OpenSea head of product Nathanial Chastain with insider trading in connection to NFTs in Manhattan federal court on Wednesday. Chastain was charged with one count of wire fraud and one count of money laundering.



<a href="https://www.justice.gov/usao-sdny/pr/former-employee-nft-marketplace-charged-first-ever-digital-asset-insider-trading-scheme" target="_blank" rel="noreferrer noopener">According</a> to the indictment, Chastain was accused of buying dozens of NFT (non-fungible tokens) with the prior knowledge that the assets would be featured on the NFT marketplace.&nbsp;



He then sold them at a profit two to five times the original purchase price using anonymous digital currency wallets and anonymous accounts on OpenSea.



Reuters <a href="https://www.reuters.com/technology/opensea-employee-charged-with-insider-trading-nfts-2022-06-01/" target="_blank" rel="noreferrer noopener">reported</a> that Chastain acquired up to 45 NFTs between June and September 2021.



US Attorney Damian Williams stated that “NFTs might be new, but this type of criminal scheme is not,” adding that Chastain’s “betrayal” and other insider trading crimes would be stamped out — “whether it occurs on the stock market or the blockchain.”



Chastain <a href="https://cms.blockworks.co/openseas-nate-chastain-calls-it-quits-after-insider-trading-allegations/" target="_blank" rel="noreferrer noopener">resigned</a> from his position after being suspected of profiting from insider information in September 2021. His suspicious wallet activity on Etherscan was initially flagged by perceptive Twitter users.



A spokesperson for OpenSea told Blockworks that Chastain was asked to leave because his behavior was &#8220;in violation of our employee policies and in direct conflict with our core values and principles.&#8221;



OpenSea admitted that an employee used inside knowledge to outsmart the market, and the company’s CEO Devin Finzer publicly accepted Chastain’s resignation in a blog post. At the time, Finzer claimed that OpenSea put new rules in place to protect against this.



This case is being handled by the Office’s Securities and Commodities Fraud Task Force, with investigation aid from the National Cryptocurrency Enforcement Team.



Each of the charges carry a potential maximum sentence of 20 years in prison.



Update on June 6, 2022 at 1:49 pm ET: Chastian was asked to leave OpenSea before his resignation.



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Former OpenSea Exec Charged With NFT Insider Trading

Sam Reynolds

<div id="highlights-block_6144668b6995f" class="highlights">
 <ul>
 <li>Chastain is alleged to have purchased NFTs before they were posted publicly, profiting from their subsequent rise</li>
 <li>In a blog post, OpenSea CEO Devin Finzer said he had accepted Chastain’s resignation and new rules have been put in place to prevent such behaviour from happening again</li>
 </ul>
 
</div>



The executive at the center of an insider trading scandal involving one of the largest NFT marketplaces has resigned.&nbsp;



Nate Chastain, OpenSea’s former product head, suspected of profiting from inside information, updated his Twitter profile to say “Past: @opensea” mid-Thursday New York time. Other media reports have said that OpenSea CEO Devin Finzer specifically asked Chastain to resign. In a blog post, the <a href="https://opensea.io/blog/announcements/employee-information-use-at-opensea/" target="_blank" rel="noreferrer noopener">company admitted</a> that someone in the company was doing this, but didn’t specifically name Chastain.



Earlier this week a number of NFT traders on Twitter noticed that a wallet belonging to Chastain was always at the center of transactions involving NFTs that would appear on the front page of OpenSea.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Hey <a href="https://twitter.com/opensea?ref_src=twsrc%5Etfw">@opensea</a> why does it appear <a href="https://twitter.com/natechastain?ref_src=twsrc%5Etfw">@natechastain</a> has a few secret wallets that appears to buy your front page drops before they are listed, then sells them shortly after the front-page-hype spike for profits, and then tumbles them back to his main wallet with his punk on it?&mdash; 0xZuwubells🎄🧪 (@0xZuwu) <a href="https://twitter.com/0xZuwu/status/1437921263394115584?ref_src=twsrc%5Etfw">September 14, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">About 8 minutes later, Wallet B buys 4 pieces from the &quot;Dailydust Collection&quot;. One in particular for .25 ETH named &quot;Spectrum Of A Ramenfication Theory&quot;<a href="https://t.co/EO7bjbSxhU">https://t.co/EO7bjbSxhU</a> <a href="https://t.co/AZacOYpuHi">pic.twitter.com/AZacOYpuHi</a>&mdash; ricefarmer.eth 🍚 (@RiceFarmerNFT) <a href="https://twitter.com/RiceFarmerNFT/status/1437956088998072325?ref_src=twsrc%5Etfw">September 15, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



 From data compiled by 8BTCNews, Chastain is said to have made 19 ether, or around $67,000.  



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">How much <a href="https://twitter.com/hashtag/opensea?src=hash&amp;ref_src=twsrc%5Etfw">#opensea</a> product lead earned through insider trading. Data collected by our friend <a href="https://twitter.com/BlockBeatsChina?ref_src=twsrc%5Etfw">@BlockBeatsChina</a> <a href="https://t.co/lJYOdQ8t0I">https://t.co/lJYOdQ8t0I</a> <a href="https://t.co/UQpRfj1LjR">pic.twitter.com/UQpRfj1LjR</a>&mdash; 8BTCnews (@btcinchina) <a href="https://twitter.com/btcinchina/status/1438041142306623491?ref_src=twsrc%5Etfw">September 15, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Chastain&#8217;s wallet address is known in part because of his public display of CryptoPunk Punk #3501, currently valued at upwards of $340,000, <a href="https://zapper.fi/account/0xa3a4548b39da96eb065ff91811ca30da40431c0d/nft" target="_blank" rel="noreferrer noopener">according to DeFi dashboard Zapper</a>.



<h3 class="wp-block-heading">Insider and wash trading a concern for NFT industry</h3>



In an August report, crypto research house Nansen cautioned that it detected possible signs of wash trading from some of the largest token founders and markets.



“While something appears amiss, it definitely isn’t incriminating evidence of wash trading, because they aren’t being sold directly to each other,” Nansen analyst Ling Young Loon is quoted in <a href="https://www.bnnbloomberg.ca/growing-nft-industry-sees-signs-of-amiss-behavior-study-shows-1.1644450" target="_blank" rel="noreferrer noopener">Bloomberg</a> as saying. “The wallets that they eventually sell to may be related, but that would require a much more rigorous study.” 



As early as January 2020, NonFungible, a <a href="https://nonfungible.com/blog/bad-behaviors-nft-blockchain" target="_blank" rel="noreferrer noopener">data and news site</a> was raising concerns about the prevalence of wash trading within the NFT market as a way for founders to build hype around their tokens. 



Even the most famous sale of an NFT, the $69.3 million tagged “Beeple’s Everyday: The First 5000 Days” in March via Christie&#8217;s auction house, <a href="https://amycastor.com/2021/03/14/metakovan-the-mystery-beeple-art-buyer-and-his-nft-defi-scheme/" target="_blank" rel="noreferrer noopener">is dogged by shades</a> of wash trading, according to crypto blogger Amy Castor. 



Metakovan is also behind Singapore-based <a href="https://www.metapurse.fund/" target="_blank" rel="noreferrer noopener">Metapurse</a>, a crypto-based investment firm. Metapurse’s mission, according to its website, is to “democratize access and ownership to artwork.” The firm has been acquiring NFTs. It purchased Beeple’s “Everdays: 20 Collection” artworks for $2.2 million in December.



Metapurse offers fractionalized ownership of all of Beeple’s works via its proprietary B20 token. Beeple, the artist, owns 2% of all the B20 tokens, according to Castor. Not the same level of wash trading as to what Chastain is alleged to have done, but a problematic conflict of interest nonetheless.&nbsp;



At the time of the auction of Beeple’s work, each B20 was worth just under $25, according to <a href="https://www.coingecko.com/en/coins/b20" target="_blank" rel="noreferrer noopener">CoinGecko</a>. Now each token is worth around 92 cents.



<a href="https://cms.blockworks.co/data-shows-growing-secondary-nft-market/" target="_blank" rel="noreferrer noopener">Recent data from NonFungible</a> estimates that the secondary market has nearly 45,000 active buyers versus the 25,000 in the primary market, along with much higher USD volume being traded, fueling concerns that some portion of NFT volume may be spurius.



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