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 his friend. Sameer Ramani for alleged insider trading. SEC against Ihan Wahi, Nikhil Wahi and Sameer Ramani2:22-cv01009 (WD Wa. 21 Jul 2022); United States versus Ishan Wahi, Nikhil Wahi and Sameer Ramani, 22-cr-392 (SDNY 2022). Both the Complaint and the Charges address the same underlying behavior of Wahi, who allegedly gave his brother and friend dozens of tips to purchase certain cryptocurrency-linked digital assets (the “Digital Assets”) over a period of several months, just before making them public Exchanges have been listed on Coinbase.
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. After Coinbase announces that a particular digital asset will be listed on its trading platform, the digital asset’s price and trading volume often increase significantly due to its size. The Company has confidentiality requirements regarding when new listings of digital assets are announced to the public, including prohibiting employees from purchasing and trading in digital assets prior to the announcement of the related listing and disclosing information about new listings to anyone outside of the company to pass on society.
According to the charges, product manager Ishan Wahi was directly involved in the process of listing digital assets on the platform and had knowledge of which digital assets Coinbase planned to list and when such listing would take place. 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 Justice Department indictment, Ishan Wahi disclosed confidential information to his brother Nikhil Wahi and Ishan Wahi’s friend Sameer Ramani about the timing of the listing announcement. Nikhil Wahi and Ramani used this confidential information to buy digital assets immediately prior to these announcements. Their investments ranged from $60,000 to over $610,000 and resulted in total profits of at least $1.5 million.
The alleged scheme surfaced after a prominent Twitter account posted on April 12, 2022 that an Ethereum blockchain address had 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 by analyzing blockchain and IP address tracking, which allowed them to link 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, telling his colleagues he would be absent indefinitely to take care of family matters. and bought 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 counts of wire fraud. Nikhil Wahi and Ramani were each charged with one charge of conspiracy to commit wire fraud and one charge of wire fraud. The indictment alleges that the fraud was committed through Ishan Wahi’s dereliction of duty with Coinbase, which was deprived of use of confidential business information. The indictment also alleges that Ishan Wahi disclosed confidential information about fourteen listings of 25 digital assets to his two co-conspirators, who traded in that information. The indictment does not refer to the assets as securities, and the charges in the indictment do not sound like securities fraud as would a traditional insider trading prosecution.
The SEC complaint alleges that the trio violated insider trading laws under Section 10(b) and Rule 10b-5 of the Exchange Act. The complaint alleges that at least nine of the 25 digital assets referenced in the indictment are securities because they are “investment contracts” in the traditional sense Howie Test of securities: “an investment of money in a common enterprise, with a reasonable expectation of gains from the efforts of others.” Specifically, the complaint alleges that issuers’ assets were bought and sold to raise money for the issuer procure. The complaint does not directly address why the remaining sixteen assets are not securities. The complaint further alleges that Ishan Wahi Nikhil Wahi and Ramani, who traded this information, provided material, non-public information about Coinbase’s asset listing announcements.
This case marks the first application of insider trading principles to cryptocurrency assets filed by the SEC or DOJ. While it is not uncommon for the DOJ and SEC to investigate insider trading allegations in parallel, it is unusual for the DOJ to bring charges unrelated to securities or securities laws while the SEC makes standard securities law-based insider trading claims based on the same facts. The DOJ has been using wire fraud, with its less complicated elements, for some time to increase securities law-based insider trading fees, but here the DOJ seems to want to avoid a debate about whether the digital assets in question are actually securities.
Alternatively, the SEC has clearly signaled through its enforcement actions and public statements that it will take a very strong position in enforcing securities laws against the digital asset industry, and the Coinbase insider trading case is further evidence of its determination to do so. Unless the SEC case is stayed — and the DOJ doesn’t intervene — there could be a decision in the not too distant future as to whether the specific digital assets in the SEC complaint are in fact securities.