On July 21, 2022, the Securities and Exchange Commission (“SEC”) announced insider trading charges against a former Coinbase product manager, Ishan Wahi, his brother, Nikhil Wahi, and a friend, Sameer Ramani, for trading ahead of announcements that certain digital assets would be made available to trade on Coinbase. In its complaint, the SEC names nine digital assets it alleges are securities.
From at least June 2021 through April 2022, according to the SEC, Ishan Wahi, a citizen of India residing in Seattle, where he worked for Coinbase, repeatedly tipped the names of tokens to be listed by Coinbase to Nikhil Wahi and Ramani, who then traded shortly ahead of the listing announcements. In total, the scheme involved trading in 25 digital assets and generated more than $1.1 million in illicit profits. Ishan Wahi used a phone with a non-U.S. phone number to communicate with Nikhil Wahi and Ramani. After he was contacted by Coinbase’s Director or Security Operations, Ishan Wahi alerted his co-defendants, then was arrested attempting to leave the country.
The SEC alleges that, on June 6, 2021, Ishan Wahi learned that AMP would be listed on Coinbase. Over the next two days, wallet addresses controlled by Ramani purchased nearly $80,000 worth of AMP. On June 8, 2021, Coinbase announced the listing and the price of AMP rose more than 11%. Nearly all of the AMP held by the two addresses was then sold, yielding $17,950 in profits. The SEC further alleges transactions ahead of listing announcement for POWR, RLY, DDX, XYO, RGT, LCX, DFK, and KROM. This conduct violated Coinbase’s policies, which identified “information about a decision to list, not to list, or add features” to a digital asset as material, nonpublic information and prohibited disclosure of such information to others.
The Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, stated, "We are not concerned with labels, but rather the economic realities of an offering. In this case, those realities affirm that a number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading ahead of their listing on Coinbase. Rest assured, we’ll continue to ensure a level playing field for investors, regardless of the label placed on the securities involved."
The SEC is seeking against the defendants a permanent injunction against violations of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, civil penalties, and disgorgement.
This is a first of its kind insider trading case and the SEC must prove that one or more of the assets named in the complaint are securities. In a parallel criminal action, the United States Attorney’s Office for the Southern District of New York charged the three individuals with wire fraud, not securities fraud, avoiding the additional burden of having to prove the assets were securities.
In other words, the case represents an interesting strategic decision by the SEC because it requires the SEC to prove that at least one of the tokens named in the complaint is a security, which given the resource constraints of the SEC may seem to be an injudicious application of resources. Those that accuse the SEC of engaging in regulation by enforcement might think that the SEC decided to bring this action to demonstrate that insider trading rules apply to cryptocurrencies or crypto exchanges. Others have argued that it might be another salvo in a brewing turf war with the CFTC. CFTC Commissioner Pham seems to imply that it could be both. Or perhaps it is part of a decision to pursue every possible case related to cryptocurrencies. Gotta catch them all?
The same day as the charges were announced Coinbase’s Chief Legal Officer published a blog post in which he asserted the company’s view that no assets listed on its platform are securities, including those named in the SEC’s complaint, which it has no plans to delist. The blog post also said Coinbase cooperated with the investigation.