SEC And DOJ Bring First Ever Charges For Cryptocurrency Insider Trading Tipping Scheme
Government/Regulatory Enforcement
This links to the home page
  • SEC And DOJ Bring First Ever Charges For Cryptocurrency Insider Trading Tipping Scheme

    On July 21, 2022, the Securities and Exchange Commission (“SEC”) filed a complaint and the Department of Justice (“DOJ”) unsealed an indictment against Ishan Wahi, a former Coinbase employee, his brother, Nikhil Wahi, and friend, Sameer Ramani, for alleged insider trading.  SEC v. Ihan Wahi, Nikhil Wahi, and Sameer Ramani, 2:22-cv01009 (W.D. Wa. July 21, 2022); United States v. Ishan Wahi, Nikhil Wahi, and Sameer Ramani, 22-cr-392 (S.D.N.Y. 2022).  Both the complaint and indictment concern the same underlying conduct by Wahi, who allegedly provided dozens of tips to his brother and friend over several months to purchase certain digital assets tied to cryptocurrencies (the “digital assets”) shortly before they were publicly listed on Coinbase’s exchange.

    Coinbase, which operates one of the largest digital asset trading platforms in the world, allows users to trade various digital assets that it has listed for trading on its trading platform.  As a result of its size, after Coinbase makes an announcement that a particular digital asset will be listed on its trading platform, the price and trading volume of the digital asset often increases significantly.  The Company has confidentiality requirements regarding when new listings of digital assets will be announced to the public, including that employees are prohibited from purchasing and trading on any digital assets in advance of associated listing announcements and from disclosing information about new listings to individuals outside of the company.

    According to the charges, product manager Ishan Wahi was directly involved in the process for listing digital assets on the platform and had knowledge of which digital assets Coinbase planned to list and the timing of such listing.  As a result, Ishan Wahi had regular access to confidential information about the Company’s digital asset listing plans.  Between June 2021 and April 2022, according to the DOJ’s Indictment, Ishan Wahi disclosed confidential information to his brother, Nikhil Wahi, and Ishan Wahi’s friend, Sameer Ramani, concerning the timing of listing announcements.  Nikhil Wahi and Ramani used this confidential information to purchase digital assets immediately preceding those announcements.  Their investments ranged from $60,000 to over $610,000 and resulted in gains totaling at least $1.5 million.

    The alleged scheme surfaced after a prominent Twitter account posted on April 12, 2022 that an Ethereum blockchain address made significant purchases of digital assets 24 hours before Coinbase’s listings.  Shortly thereafter, Coinbase publicly stated that it was already investigating the matter.  The SEC and DOJ also claim to have uncovered the suspicious trading activity through analysis of block chain and IP address tracing, allowing them to connect the anonymous transactions to Ishan Wahi and Ramani.

    After learning that he was required to meet with Coinbase’s Legal Department as part of Coinbase’s internal investigation, Ishan Wahi allegedly sent a screenshot of the request to Nikhil Wahi and Ramani, told his co-workers he would be out indefinitely to attend to family matters, and purchased a one-way ticket to India.  Authorities stopped him before he could board his plane.

    A grand jury indicted Ishan Wahi on two counts of conspiracy to commit wire fraud and two substantive counts of wire fraud.  Nikhil Wahi and Ramani were each charged with one count of conspiracy to commit wire fraud and one substantive count of wire fraud.  The indictment alleges that the fraud was committed through Ishan Wahi’s breach of duty to Coinbase, which was deprived of the use of confidential business information.  The indictment further alleges that Ishan Wahi disclosed confidential information about fourteen listings covering 25 digital assets to his two co-conspirators, who traded on that information.  The indictment does not refer to the assets as securities and the Indictment’s charges do not sound in securities fraud as would a traditional insider trading prosecution.

    The SEC complaint charges the trio with violating insider trading laws under Section 10(b) and Rule 10b-5 of the Exchange Act.  The complaint asserts that at least nine of the 25 digital assets referenced in the Indictment are securities because they are “investment contracts” under the traditional Howey securities test: “an investment of money, in a common enterprise, with a reasonable expectation of profits to be derived from the efforts of others.”  In particular, the complaint alleges that the assets were bought and sold by issuers to raise money for the issuer.  The complaint does not directly address why the remaining sixteen assets are not securities. The complaint further alleges that Ishan Wahi provided material, nonpublic information about Coinbase’s asset listing announcements to Nikhil Wahi and Ramani, who traded on that information.

    This case is the first application of principles of insider trading to cryptocurrency assets brought by the SEC or DOJ.  While it is not unusual for the DOJ and SEC to investigate insider trading allegations in parallel, it is unusual, for the DOJ to bring charges that make no reference to securities or the securities laws while the SEC, on the same facts, brings standard securities law-based insider trading claims.  The DOJ has for some time used wire fraud, with its less complicated elements, to augment securities law-based insider trading charges, however here it appears that the DOJ wanted to avoid a debate about whether the digital assets at issue are in fact securities.

    Alternatively, the SEC has clearly signaled through its enforcement actions and public pronouncements that it will take a very strong position in imposing the securities laws on the digital asset industry, and the Coinbase insider trading case is further evidence of its determination to do so.  If the SEC case is not stayed – and DOJ does not intervene – there may be a ruling in the not-too-distant future on the question of whether the particular digital assets in the SEC complaint are in fact securities.