Jan M. Folena
PartnerCo-Chair, Securities & Regulatory Enforcement
Client Alert
Second Circuit Vacates Wire Fraud Conviction of OpenSea NFT Marketplace Product Lead
share this page
Key Takeaways
- While the court’s ruling provides that the federal wire fraud statute does not protect property interests absent a showing of “commercial value,” such interests may still be protected under state criminal codes.
- Similarly, although the case did not involve traditional insider trading or securities fraud charges, as NFTs likely are not securities, the court’s finding that information with no “commercial value” is not a protected property right may also support an assertion that such information is not material for purposes of the federal securities laws.
- Companies seeking to protect confidential information, regardless of its purported commercial value, should be sure to carefully draft confidentiality agreements to protect the misappropriation of such information.
The U.S. Court of Appeals for the Second Circuit recently vacated wire fraud and money laundering convictions of the former head of product for OpenSea, the largest non-fungible token (NFT) marketplace. In United States v. Chastain,[1] the Second Circuit on July 31 found that the district court erred in instructing the jury on the meaning of the term “property” under the federal wire fraud statute.
Jury Convicts on Wire Fraud, Money Laundering Charges
A federal jury found Nathaniel Chastain guilty of wire fraud and money laundering in 2023 for allegedly using OpenSea’s purportedly confidential information to trade various NFTs for his personal benefit. NFTs are unique digital artifacts that can be bought and sold on a blockchain. OpenSea provided the largest online marketplace for buying, selling and minting NFTs across a range of blockchains. OpenSea operated its business by charging a flat 2.5% fee for all transactions executed on its platform, but did not directly engage in the purchase or sale of NFTs.
As part of its efforts to promote user interest and engagement with the marketplace, OpenSea selected to feature specific NFTs in a section of its public website. OpenSea indicated that the featured section was intended to “engage indie artists and show that OpenSea is a place for them too.”[2] OpenSea solicited proposals for its featured NFTs from the public as well as from its own employees. The associated publicity from these features generally led to price increases for the featured NFTs. OpenSea did not collect any direct fees or profits from the NFT creators, stating that doing so was not aligned with the company’s main goals and would have compromised its brand of neutrality.
As head of product, Chastain was responsible for selecting the NFTs that OpenSea ultimately featured on its website. Chastain purchased the NFTs that he selected to feature on the company’s website before they were featured and sold those NFTs at a profit after they were featured and had increased in value. After several transactions involving featured NFTs were made from Chastain’s personal account, OpenSea users turned to Twitter to call out his conduct. Chastain made approximately $57,000 by trading on OpenSea’s featured NFTs before the company asked him to resign.
The U.S. Attorney's Office for the Southern District of New York filed a two-count indictment against Chastain: one count of wire fraud in violation of 18 U.S.C. § 1343 and one count of money laundering in violation of 18 U.S.C. § 1956. Following a jury trial, Chastain was convicted on both counts.
Second Circuit Finds No Property Interest Absent Commercial Value
Chastain appealed his conviction to the Second Circuit, where he argued that information regarding which NFTs should be featured on OpenSea’s website was not “property” within the meaning of the wire fraud statute because it had no commercial value to the company. The Second Circuit agreed and vacated his convictions. The court held that the U.S. District Court for the Southern District of New York had erroneously instructed the jury as to the wire fraud charge, which also served as the predicate crime for the money laundering count, because its instruction could have resulted in a conviction for perceived unethical business practices, as opposed to fraudulent misappropriation of corporate property as required to sustain a conviction pursuant to the wire fraud statute.
The prosecution presented no evidence that OpenSea stood to financially benefit from the information that Chastain had about the NFTs to be featured on the company’s website or that maintaining the confidentiality of such information was necessary to OpenSea’s business. Hence, Chastain’s failure to maintain the confidentiality of such information had little, if any, effect on the company’s reputation or market position. Accordingly, such information could not be considered a protected property interest under the federal wire fraud statute. The court explained that, while the wire fraud statute applies to both tangible and intangible property interests, “[i]nformation cannot qualify as a traditional property interest if its holder has no economic interest in its exclusive use or in otherwise keeping the information confidential.”[3] To hold otherwise, the court warned, would create a rule under which almost any deceptive act could give rise to criminal liability, vastly expanding federal jurisdiction beyond that statutorily authorized.
